The first of August saw another first from the Bank of England - the first rate cut in more than four years.
The Bank's Monetary Policy Committee finally cut the interbank lending rate โ the basis of all bank and financial dealing and particularly of lending in the UK - from 5.25% to 5%.
The new rate is still along way from the 0.1% that was set back in November 2021 in the wake of the Covid crisis, but any cut will come as good news to borrowers who were facing high mortgage costs as well as a cost-of-living crisis thanks to inflation.
What will this reduction mean to you and your financial plans?
Why the change?
The Bank of England is charged with keeping the UK economy on an even keel. It is no easy task, especially when events outside its control, like the pandemic and war in Europe distort the economies of the entire world โ and when inflationary pressures meant money lost value by more than 10% a year.
The base rate - properly, the interbank lending rate - is what the Bank of England charges other banks and lenders to borrow money. The Bank of England had hiked interest rates to bring down inflation, with the theory being that if people have less money to spend, it will bring demand for goods down, lower prices and help resist inflation.
The Bank upped rates to control inflation, and with the headline inflation figure falling to the 2% rate recorded in May and June. Seeing the figures, the bankโs Monetary Committee narrowly voted for a cut. Although inflation has increased to 2.2% in the 12 months to July, which was expected, it seems that their approach may have worked.
The move may just be a toe in the water, or the first step towards more reductions to come. If inflation stays low, they might even cut the rate further.
But most of us will be more interested in the immediate impact on our own finances.
Your mortgage may go down
The cost of most mortgages is not directly set by the Bank of England official base rate.
Lenders source their finance in the money markets. The cost of this money is influenced by the expected direction of base rates, just as much as the current rate. However, if you have a tracker mortgage tied directly to the bank base rate, you should see an immediate cut in the interest you pay each month โ although you may have to wait until September for the reduction to work through.
Most borrowers using a mortgage to buy their home are on fixed rate loans for 2 or 5 years. If you have a fixed rate mortgage, there will be no immediate change in what you pay. But this could still be good news, because when your fixed rate ends, any deal you transfer to, may be considerably lower thanks to the cut.
However, the fall in the bank rate was anticipated by the industry, and mortgage rates have already begun to fall. The lenders have already priced in cuts, as they competed for customers. They dropped rates secure in the knowledge that they wouldnโt be losing out for very long.
That said, there could be more good mortgage deals coming. If you are ready for a move or a remortgage it could be time to call us at Continuum.
2024 has been a buyer's market so far, as high borrowing costs have resulted in a slowdown in sales. Sellers will be hoping to see more buyers coming to the market as mortgage rates come down, supporting house price growth.
What about your savings?
While the cut will be welcomed by the roughly 1.2m borrowers on fixed rate mortgages, savers will lose out.
Just as banks and building societies have already been factoring in a base rate cut for mortgages, they have also been applying the same predictions to the rates the offer savers.
Saving rates have already fallen from their peaks earlier in the year on many types of accounts. If you don't need to access the funds in the short term, there could still be time to get good returns from a one or two-year fixed-rate account, but with further rate cuts in the not-too-distant future there is a distinct possibility you may need to act fast.
Finding the best returns for your savings now is essential and could be easier with an expert guide. Again, a call to us at Continuum could be the best way to find the accounts with the top returns.
Will your investments be affected?
Investments โ and crucially that includes pensions โ will be affected by the news from the bank, although the impact will be less direct.
Businesses will be able to pay less for the funds they need to operate. Lower interest rates may therefore boost the valuations of certain companies.
UK stocks jumped after the Bank of Englandโs decision, with the domestically focused FTSE 250 rising as much as 0.9% just after the rate cut was announced. It suggests the cut could be a boost to an already recovering economy.
If you are invested in bonds for income, or trading bonds, remember the effects on bond prices. As new bonds are issued at lower rates, older bonds, which offer higher interest rates, become more valuable. Investors are willing to pay more for older higher-yielding bonds, driving up their prices, while the return on new bonds looks less attractive.
Looking at your investment portfolio in light of the new base rate might be vital.
If retirement is close, and you need to secure your pension pot, or if you have already retired and are using drawdown, you need to get an expert eye on the impact on your pension plansย
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What happens now?
Some observers believe that the Bank of England will be making more cuts to the bank lending rate in coming months. Others are less certain, and suggest that the Bank will be cautious, watching the effects of the current cut on inflation and economic outlook before making any policy decisions, let alone cuts.
The more pressing question for most of us is what will happen to our own financial plans.
The bank base rate affects the entire economic climate, and that includes our long-term financial planning. We may have weathered the worst of the interest rate storm, but we may need to check we are on the right course for our financial goals.
A new set of calculations based on a lower base rate may be essential as well as some new financial tactics.
An interest rate cut means its time to review your financial plans. The simplest way to do that is to call us at Continuum.
Bank of England cuts interest rates for first time in four years (telegraph.co.uk)
Inflation rises to 2.2% in first increase of the year - what it means for your money - Mirror Online
The FTSE 100 jumps after the Bank of England meeting. Hereโs whatโs next (msn.com)
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product or savings and investment strategy and you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
The Financial Conduct Authority does not regulate deposit accounts.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits areย taken. Pension savings are at risk of being eroded by inflation.
These investments do not include the same security of capital which is afforded with a deposit account.
