The Bank of England (BoE) announced on Thursday its decision to hold the Bank Rate — what we might simply call the interest rate — at 4.25 per cent, following a cut to that level in May.
The Bank’s nine-person Monetary Policy Committee (MPC) voted by a majority of six-three to maintain rates at that level, with the dissenters voting for another quarter-point cut down to 4.0 per cent.
The committee underlined “the risks of inflation persistence” and “global uncertainty”, sticking to their mantra that a “gradual and careful approach” to cutting rates remained appropriate.
Here’s a brief rundown of what the current interest rate might mean for you:
What does the interest rate mean for mortgages?
Broadly speaking, as increasing interest rates over the last few years have meant mortgage repayments going up, then the reverse should also hold true: lower rates, lower repayments. However, there are several important things to note.
Firstly, that it’s only the interest on the repayments which should change — your capital repayments will naturally decrease the more you pay off your mortgage. Secondly, the base rate isn’t the rate you are necessarily charged by your bank or lender for the mortgage — they’ll base theirs off the BoE rate but it doesn’t have to be the same.
More than half a million people do, however, have a mortgage which tracks the BoE interest rate and those will see an immediate change. Far more have fixed term deals which expire each year and need renegotiating.
Additionally, if you’ve got a fixed term on a mortgage plan, you won’t see a change in any case until that comes to an end.
New mortgage products tend to be based on swap rates – future expectations of interest rates movements rather than the current Bank Rate.
What about savings accounts?
If you have money in a savings account, it’s the other side of the see-saw to mortgages: rates going down mean you’ll earn less interest.
As there’s still a bit of a fierce battle raging among banks and building societies for customers, it’s still possible to get good deals if you are happy to lock in money for a fixed period of time or contribute regular amounts, with several offering around 4.5 per cent or even more.
There are always terms and conditions to be met, so ensure it suits your circumstances, but the opportunity remains there to save and earn money at a better rate than inflation, which currently sits around 3.5 per cent.
Do be aware of the amount of interest you can earn without being taxed, though. If your savings account interest rate isn’t fixed, banks can always change the rate you get up or down.
A tax-efficient way of saving is to use a Cash ISA, where everyone has a £20,000 personal allowance each year.
Bills and repayments
Credit card repayments and bank or car loans are of course also affected by interest rates, as the amount they all charge for borrowing will be altered.
For credit card users, it’s always ideal to pay off the full amount each month if you are able to, to avoid interest being charged at all – depending on your circumstance and the account type, they can be one of the more costly ways to borrow.
Again, it may not be immediate that lenders alter their rates after a base rate change, but get in touch with them to assess your options if you feel your repayments could or should be lower.
