In a move that was widely predicted, the Bank of England has decided to cut interest rates from 0.50% to 0.25%. Not only is this a new record low, but it marks the first base rate change in over seven years, driven by economic and market uncertainty as a result of the EU referendum result. But what does it mean for you? We take a closer look.
Unfortunately, the base rate cut means it's a bad day to be a saver, said Charlotte Nelson, finance expert at Moneyfacts. Savings rates have already plummeted to record lows in recent weeks – continuing the downward spiral witnessed for several years now – and deals are being pulled from the market at an alarming rate, so a cut to interest rates is only going to increase savers' pain.
"Rates have already tumbled since the last base rate change," said Charlotte. "For example, the average easy access account has fallen from 0.94% in March 2009 to 0.55% today, while the average two-year fixed rate bond has fallen from 2.83% to 1.31% over the same period.
"The base rate cut does not necessarily mean that providers will pass on the reduction to savers, but seeing as rates are already dropping, this latest change will give them yet another opportunity to cut their rates. Anyone considering switching deals will therefore need to do so sooner rather than later."
Happily, there's far better news where mortgages are concerned, and borrowers will hopefully be able to reap the rewards. After all, they've already been enjoying some of the lowest rates on record in recent months, and the cut to base rate will provide further impetus to the rate-cutting trend.
"Thanks to Government lending initiatives and falling SWAP rates, lenders are very keen to attract new customers and retain existing business, which is why the average two-year fixed rate mortgage has fallen from 4.79% in March 2009 to 2.48% today," added Charlotte.
"This cut in base rate will also be a significant boon to those currently sitting on their Standard Variable Rate (SVR). Based on the average SVR of 4.80%, today's cut represents a drop of £28.64 to monthly repayments [based on a £200,000 mortgage over a 25-year term on a repayment only basis]. However, with fixed mortgage rates still currently sitting at record low levels, borrowers will be better off looking elsewhere for a new deal."
Pensions may not initially come to mind when thinking of interest rates, but they can be just as impacted by rate fluctuations – and like in the savings market, the latest rate cut doesn't bode well.
"The interest rate cut is not only bad news for those pensioners relying on their savings to generate an income, but also for those on the verge of retirement who may be looking to secure an income through an annuity, as it's likely to add extra downward pressure on annuity rates at a time when they are already at record lows," explained Richard Eagling, head of Pensions at Moneyfacts.
"The greater demand for gilts could see yields fall further, and since these are used to back annuities, it seems inevitable that annuity rates will take a hit."
However, this only highlights the need to shop around for your annuity to ensure you're getting the best deal possible, and that way, the impact of a base rate cut hopefully won't be quite so great.
Make the most of things – compare mortgages to snap up a new deal.
Compare savings accounts to boost your returns as much as possible – and if you fix now, you may beat any future rate cuts.
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