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Interest rates return to record lows: what it means for your money

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11/03/2020
The Bank of England has announced an emergency interest rate cut from 0.75% to 0.25% to support the economy in the wake of coronavirus. With rates at record lows, how will it impact your money?

The base rate is back to its joint lowest level in history and today’s unscheduled cut is likely to impact you if you’re a saver or are paying off a debt.

Below we outline what the cut means for your money if you’re a…

Cash saver

Cash savers have been hit the hardest in the ‘lower-for-longer’ interest rate environment in the aftermath of the financial crisis over a decade ago.

Today’s move cutting 0.5% from the base rate means savers will have to put up with dismal interest rates for longer.

Market-leading rates have plummeted, providers have scaled back their enticing offerings and the cut means rates are likely to head south.

The average easy access account pays 0.56%, down from 0.94% in March 2009. The average notice account today pays 1.03%, down from 1.11% in March 2009. ISAs have fared worse, sitting at an average of 1.77% in 2009 to 0.84% (easy access) today.

A new £100bn Term Funding Scheme was also announced which encourages banks to lend to businesses. With more cheap money from the government, this means banks won’t need to offer attractive rates to gain customers.

Rachel Springall, finance expert at data site Moneyfacts, said this is devastating news for savers:

“As we have seen in just the past 12 months, competition is stagnating, and it has become the norm to see providers cut rates to adjust their market position rather than launch headline-grabbing deals.

“It almost seems inevitable at this stage that the base rate reduction could get passed on in full to savers over the next few months.”

Springall added this should be a signal for savers to shop around for a new deal.

“As we have seen time and time again, the biggest high street banks are unlikely to be matching base rate – let alone beating it, so this cut is the perfect excuse to pay out less in interest to consumers.”

Mortgage borrower

Homeowners have enjoyed the benefits of a fixed rate war meaning average rates on a five-year deal are at record lows. Data from the Bank of England revealed 92% of mortgages taken out in 2019 were to fixed rate deals, showing their popularity.

With today’s announcements, the exact way you’ll be affected depends on the type of mortgage you have.

If you have a variable rate mortgage (known as a default rate or standard variable rate) usually applied after you finish an introductory, tracker or fixed rate product, the rates are set by the lender so they can go up as well as down.

As the Base Rate has gone down, lenders may cut their Standard Variable Rates (SVR) which could mean your monthly payments fall. However, if you’re on a lender’s SVR, this is usually more expensive than a tracker or fixed term mortgage, so it’s likely you’ll be overpaying anyway. It may be worth looking to switch to a fix to benefit from the cut in interest rates.

Tracker rate: These are a type of variable rate mortgage and they follow the Bank of England’s Base Rate. However, they don’t match the rate exactly so the rate you pay may be at a margin above this. As the Base Rate has fallen to 0.25%, you should benefit from lower monthly repayments.

Fixed rate: If you’re on a fixed rate mortgage, you should not see any change to your monthly payments. Alex Maddox, capital markets & digital director at Kensington Mortgages, said fixed rates won’t drop as quickly “as lender’s funding costs may still stay high even after this rate cut”.

Investor

The rate cut comes at a volatile time for markets amid the outbreak and perseverance of coronavirus. Monday this week saw the FTSE 100 index fall 8% in early morning trading, wiping more than £130bn off the value of companies listed on the blue-chip index.

Helal Miah, investment research analyst at The Share Centre, said co-ordinated monetary and fiscal measures should signal to consumers and businesses that the authorities are acting.

Ahead of the announcement markets indicated that the FTSE 100 would open down by roughly 1% and immediately after the announcement indications turned to a 1% rise on the UK stock market, opening up by 2% at 8am.

Miah said: “This is little relief for investors who have lost 15-20% over the past month and this morning’s moves will just become part of the noise in this crisis. The very small moves in the pound immediately after the announcement may be a better reflection of insignificance global investors place on this event in the context of the current events.

“In the UK lower interest rates along with other measures announced such as the Term Funding for Small and Medium Enterprises (TFSME), reduction of the counter cyclical capital buffers to zero and freed up capital that is not to be paid out as dividends or bonuses by banks will help cushion the blow to a number of businesses especially smaller ones, but it may do little to boost spending among consumers preparing for harder times.”

Pension saver/those approaching retirement

Steven Cameron, pensions director at Aegon, said the rate cut poses particular challenges for those approaching retirement.

“The recent fall in the stock market will mean those whose pension is primarily invested in stocks and shares will have seen their pension pot fall in value. The reduction in interest rates creates a double whammy as annuity rates are also likely to be cut.

“As a result of the pension freedoms, individuals with defined contribution pensions now have flexibility over when they start taking a retirement income and can choose to remain invested, drawing an income, rather than buying an annuity.

“While there is no guarantee around if and when fund values and annuity rates will bounce back, individuals about to retire might want to seek advice on their options, including potentially deferring locking into annuities at a particularly adverse point in time,” he said.

Overdraft or loan user

If your credit card provider is one that links your rate to base rate you will see cheaper borrowing costs, but the impact will be minimal, according to Andrew Hagger of independent site Moneycomms.

“0.5% less on a £2,000 credit card balance equates to just £10 savings in interest in a year – less than a pound a month.

“It’s those with overdrafts that could do with some help – but with most banks charging around 40% interest, a 0.5% cut isn’t going to make any meaningful difference to peoples finances,” he said.

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