Bank of England rates of interest reduce to 4.75% – the way it will influence mortgages and financial savings

The Bank of England has slashed interest rates for the second time this year.

The base rate has been trimmed from 5% to 4.75%, a move that will be greeted with relief by millions of homeowners who have watched their mortgage costs skyrocket over the past two years. However, it’s not all rosy – a dip in interest rates typically signals a drop in savings rates.

The base rate dictates the cost banks charge you when you take out a loan, as well as the return on your savings. The base rate peaked at 5.25% in August 2023 and stayed at this level until August 2024 when it was reduced to 5%.

The Bank of England held the base rate at 5% at its September meeting.

Economists had widely forecasted another cut today to 4.75% after inflation dipped below the Bank of England’s target to 1.7%.

The Bank of England had been hiking interest rates to curb inflation, with the idea being that if people have less money to spend, this would reduce demand for goods and bring down prices, reports the Mirror.

Here’s how it might affect you:

Mortgages

The type of mortgage you hold is the determining factor. For those with a tracker mortgage, repayments will decrease as these deals align with the base rate.

Research from TotallyMoney and Moneycomms reveals that the average UK homeowner with a 75% loan to value on a tracker mortgage will experience a monthly mortgage payment reduction of £32.

However, it’s crucial to note that these households have witnessed a significant increase in their mortgage costs over the past few years, following the previous Bank of England rate increases. If you possess a standard variable rate (SVR) mortgage, your deal can be altered at any time by your lender, although these usually move roughly in line with the base rate.

Typically, you’ll be transitioned to the SVR of your current lender once your existing mortgage deal concludes. Over 1.2 million individuals are on a tracker or SVR mortgage.

If you have a fixed-rate mortgage, your payments won’t alter today as you’ve already committed to a set monthly payment for a specific duration.

However, when it’s time to remortgage, you might discover that your new deal is pricier compared to your existing mortgage. Approximately 700,000 fixed-rate deals are set to conclude in the latter half of this year, as per UK Finance.

It’s advisable to compare rates to ensure you’re securing the best deal.

Ben Thompson, deputy CEO at Mortgage Advice Bureau, said: “Another rate cut is starting to move the dial back again in the borrower’s favour, following an eventful week or so since the budget. We could see swap rates and, consequently, mortgage rates fall, subject to markets settling further following the budget and the outcome of the US election also.

“Our data shows that falling rates have already impacted borrower preference. Last month, over half (54%) of borrowers opted for a five-year fixed rate, an increase of 11% versus the same period last year, clearly showing a change in customer mindset. It will be interesting to look again at this after the dust has settled following the Budget and the outcome of the US election.”

Credit cards and loans

Should your plastic be pegged to the base rate, any fluctuations up or down might impact what you pay in interest. Best give your T&Cs the once-over to see if you’re snagged by this.

Should your credit card rate change, expect a heads-up from your lender about 30 days prior.

Credit card rates are normally variable, which means they can change over time anyway. You’ll also find the rates available now if you’re taking out a new card are more expensive compared to before the first rate hike. The average credit card purchase APR in October was 35.4%, according to Moneyfacts.

Holly Tomlinson, financial planner at Quilter, advised: “Lower interest rates can lead to reduced annual percentage rates (APRs) on credit cards, making it less expensive to carry a balance. However, it’s important to note that credit card rates are influenced by various factors, and not all lenders may pass on the full benefit of the rate cut. Cardholders should monitor their accounts and consider transferring balances to cards with more favourable terms if possible.”

Interest rates on personal loans and car financing are normally fixed, but again, check with your lender to be absolutely certain. The rates on new loans are also higher now compared to last year. Moneyfacts says the average loan interest rate for someone borrowing £7,500 is 8.7%.

Savings

Watch out savers, your pot could shrink as savings rates look set to slide following another base rate cut.

Cash ISAs currently pay more than easy-access accounts and the best rate is 5.17% from Trading 212. An ISA protects your savings interest from tax but you can only put away £20,000 each tax year.

The top-rate easy-access account today is from Chip and this pays 5% – however, you’re only allowed three withdrawals a year. The best notice account is Oxbury and this pays 5.15% with a 90-day notice period. For those who can lock their cash away, Atom Bank offers a rate of 5% for six months or 4.8% for one year.

Regular savings accounts offer the best rates, but you’re normally only allowed to make small deposits each month and some accounts restrict how many withdrawals you can make. Principality Building Society pays 8% fixed for six months but you can only deposit up to £200 each month.

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “A rate cut is less of a boon for savers who have been enjoying a savings sweet spot in recent months when easing inflation collided with still-high interest rates delivering a real return for more accounts. Those that want to preserve their return must move fast by locking in the best deal possible while interest rates remain on the higher side.

“This is particularly important for anyone with money idling in a current account or an old savings account offering a dismal return. With saving rates above the 5% mark becoming increasingly rare, those with cash to spare should act now to secure bumper returns, particularly as the value of any money not working hard will erode over time once inflation is factored in.”

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