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What do record-low interest rates mean for you?

What do record-low interest rates mean for you?

Category: Money

Updated: 06/02/2014
First Published: 06/02/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Next month marks the fifth anniversary that base rate has been at its record low. On 5 March 2009 it dropped to an unprecedented 0.5% in an attempt to revive the economy and get the UK out of the recession, and with the Bank of England set to review the rate when unemployment hits 7% (currently it's 7.1%) we could be in-line for a rate rise in the not-too-distant future.

But, that probably won't happen for at least another year with analysts cautiously predicting a rise in 2015, so we thought we'd break things down by taking a look at what these record low rates have meant for borrowers and savers – and what it would mean if rates started to rise…


Chances are, borrowers started to rejoice when base rate fell as it meant mortgage rates quickly followed (helped by the Government's Funding for Lending Scheme, introduced in 2012, which gave banks and building societies access to cheap funding on the basis that they lent it out at lower rates).

With mortgage rates enjoying a period of record-low levels it means affordability has drastically improved, with monthly repayments not eating into the budget to such an extent. It also means a lot of people have been able to make regular overpayments to potentially reduce the level of interest and help them pay off their mortgage early, and if you haven't been doing that yet, why not make the most of low rates while you still can?

Paying off extra now could be well worth it when rates eventually rise, because when that happens it could put extra pressure on homeowners' budgets. Borrowers could well be worrying about how much extra they'll have to pay, because even a minimal rise of, say, 1% could easily take its toll – particularly if you've got a larger mortgage.

Luckily affordability checks are a key part of lenders' criteria for offering a mortgage and will take into account whether or not you could afford the monthly repayments on a rate increase, so ideally there won't be too much to worry about in the short-term. However, if you're on a variable rate or it's time to remortgage it could be time to switch to a longer-term fix, thereby preserving these low rates for as long as possible.


For savers, however, it's a different story. The complete opposite in fact. When base rate fell it meant interest rates on savings accounts plummeted, and they've been on a downwards trajectory ever since.

These rock-bottom rates mean savers are getting meagre returns on their cash savings, and in a lot of cases the value of their money is actually being eroded through inflation – there are currently only 77 accounts that counter the effects of tax and inflation, so with most accounts the returns that can be generated are particularly poor.

It's especially worrying for those who have a lot held in savings or who rely on the income that can be generated from it, while pensioners are hit doubly hard – not only will their savings be offering paltry returns, but rates on annuities have taken just as much of a hit so their long-term income is lower too.

That means, for most people, paying off any debt should take priority over long-term savings, as the amount you're paying in mortgage or credit card interest will far outweigh anything you're gaining from savings accounts. Then, when savings rates start to pick up, you'll have reduced your debt bill and will be able to take advantage of better savings rates – it's win/win.

Or, for those that don't have excess debts and want to keep their cash in savings, regularly reviewing the market is a must to ensure they're getting the best rates possible.

Given the state of the market at the moment, a lot of savers will undoubtedly be looking forward to the prospect of a base rate increase as it could mean savings rates start to nudge back up. Hopefully there won't be too long to wait before they can start generating real returns on their money again.

What Next?

Make the most of low mortgage rates – compare the options to find the best deal

Find the savings accounts that can generate the best returns

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.