The Bank of England has cut interest rates with immediate knock-on effects for households up and down the UK.
The BoE uses interest rates as a somewhat crude mechanism of controlling inflation, moving rates up when price increases are spiralling and cutting them back down when spending slows.
Today, the Bank of England cut base rates by 0.25 percentage points, down from 5 to 4.75, which will have implications for various household bills from mortgages to credit cards, loans and even pensions.
Mortgages
The biggest household bill change will affect mortgages. When the base rate goes up and down, mortgage rates tend to move with them – usually this begins just before the change as banks begin to preemptively change rates before it actually takes effect.
Those on tracker and variable rate mortgages will immediately see their monthly mortgage payments get cheaper, because these type of mortgages follow the base rate.
For those on an average tracker mortgage, today’s announcement will be worth £382 per year – or £15 per month per £100,000 borrowed on average.
For those on a fixed mortgage, their payments are locked until they remortgage when their fixed term ends. For those who recently grabbed short, high-rate fixes in the past two years, this change will be welcome and when their fix ends they’ll be able to remortgage to a lower rate.
But for those on longer-term fixes and still on hilariously low rates like 1 percent, they’ll still be stung for much higher bills on remortgaging, it’ll just be lower than it would have been last week.
Credit cards and loans
When the BoE base rate changes, credit card and loan rates often follow. Lower interest rates on credit cards can make the cost of repayments cheaper as the APR drops.
Of course, not all lenders will pass on all cuts and it’s worth checking to see if you can swap to a lower interest rate card with a balance transfer.
Personal loans and car finance tend to stay the same because they are a fixed rate for a set period, e.g. 36 or 48 monthly payments at a pre-agreed APR.
Bank overdraft fees
Overdraft fees sometimes also change with the base rate, and the penalty for borrowing in an arranged overdraft can reduce when the base rate reduces, although banks will not always choose to pass this on.
Savings rates
Savings rates move with the Bank of England base rate unless you have a fixed savings product which is set for a specific period but doesn’t let you withdraw.
A typical easy access savings account will be variable rate, so is likely to go down when the base rate goes down.
Last time the BoE cut rates, Chase and Santander both reduced the rates their best easy access savings accounts paid out.
If your rate goes down on your savings, it means you’ll be paid less interest each month or at the end of the year.
Pensions
Finally, pensions can be affected for pensioners looking to buy an annuity. A pension annuity converts your pension pot into guaranteed regular income for the rest of your life.
Because annuity rates are linked to the cost of government borrowing, BoE rates can also affect the rate you get.
Because the rate is locked in the day you buy your annuity, a cut to rates now could impact your income in retirement for years to come.
