Yesterday, one month later than most experts had predicted, the Bank of England announced a historic change in interest rates, the first change since 2009 – and rather than the upward rise that had been widely predicted for the past few years, it fell from 0.5% to 0.25%.
So what does this mean in practical terms?
Mortgages – For those on a tracker mortgage, as long as your lender passes on the cut to its own base mortgage rate (or if it is linked directly to the BoE base rate), your rate (and monthly payment) should go down. In all, there are about 1.5 million trackers in the UK.
However, some banks and building societies have a ‘tracker floor’, which means there is a limit to how low the percentage can go above the Bank of England base rate. In this case, your rate (and mortgage payment) would be unlikely to change.
If you have a fixed rate mortgage, you wouldn’t be affected if the rates went down during your fixed period, but when the time comes to re-mortgage – or if you’re a new homebuyer – , the options open to you could potentially be more favourable, with some experts suggesting long-term fixes even going below 2%.
Savers – In the event of an interest rates cut, it may depend if banks chose to pass on the cut to savings accounts. Some savers may decide to switch to bonds or shares, which could have the effect of driving those prices higher.
For pension savers who are using an annuity, a rate cut could make annuity rates fall by putting pressure on the long-term. This could have a potential negative effect on employee pension schemes too.
Needing currency for holidays – While interest rate cuts can often mean a weakening of the pound, it may well be the case that the currency markets will have been factoring in a cut for some time already – hence there may be little change if it does eventually happen. Interest rate cuts can be done sometimes to provide an economic stimulus – to encourage people to spend rather than to save – so perhaps this could help improve consumer confidence and boost the pound.
But what about when it does rise? – Mark Carney, Governor of the Bank of England, has warned against expecting interest rates to stay low forever in these uncertain times, and suggested that homeowners would do well to prepare their finances to be ready for a potential rise of up to 3% in the coming years.
Many homeowners, particularly those who’ve joined the market in the past seven years, will have never been faced with an interest rate rise, and tighter borrowing conditions in the future could make it harder to cope with a rise.
How your credit score could help – Having a higher credit score could mean you get better deals or lower interest rates on credit, loans and mortgages. The Experian Credit Score is a guide to help you understand your Experian Credit Report, and how the way you’ve managed the credit you’ve had in the past might affect applications you’re making now.
It can also help you to monitor your progress as you get your finances in order before you apply. Getting your credit score up could open up the potential chance to get better rates.
(original post 14 July 2016, updated 5 August 2016)