The Bank of England’s Monetary Policy Committee has voted to reduce the base rate by a quarter of a percentage point to 4.75%.
It is the second time rates have been cut this year, with the first reduction having been made in August. All but one of the Committee voted in favour of a cut. Whilst the news is positive for homeowners on tracker and other variable mortgage rates, as they will see a reduction in their monthly costs, it is less positive for savers who currently have a wide choice of accounts offering inflation-beating returns, but are likely to see rates fall over coming weeks.
The past couple of years have seen rates rise 14 times in a bid to curb rampant inflation, but with inflation holding steady in both July and August and easing to 1.7% in the 12 months to September, the Committee decided that the time was right to trim rates.
However, experts warn that this is unlikely to mark the start of a series of rate cuts. Ed Monk, Associate Director at Fidelity International, said “Today’s rate cut was nailed on, but households may have to be more patient for borrowing costs to fall over the next year.
“Despite the fact inflation is now comfortably below target at 1.7%, the speed of rate cuts is not expected to be as quick as it was just a few weeks ago. Today’s Monetary Policy Report forecasts another rise in inflation to 2.75% – back above target – over the next year.
“The Budget last week included significant spending and borrowing commitments which have resulted in a moderate increase in market interest rates, and that may also be reflected in the path for the official Bank Rate over the next year.
“There are some predictions that the Trump victory could result in higher rates in the US, which may then spill over to other markets, including the UK. That’s less certain because it is not yet clear what a Trump second term will hold, and this is unlikely to factor into the Bank’s thinking at this stage.”
Learn more about the potential impact of Trump’s win in our article What Trump’s win could mean for your money.
Here, we explain what rates reducing to 4.75% in November might mean for you, and how it’s likely to impact your finances.
Your savings
Savings rates remain competitive for now, but November’s cut makes it more important than ever for savers to take advantage of high returns whilst they’re still available.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Savers are the ones who feel the force of cuts to interest rates, and to add insult to injury, will see no rise to any personal tax or savings allowances in the short-term, making cash ISAs increasingly attractive.
“After this latest base rate decision, providers may start to reduce the rates on their variable accounts. As a result, savers should act quickly if they want to secure a competitive rate. Any savers with money that they don’t need to access can protect their savings from any potential future falls in interest rates by locking them away into a fixed rate bond.”
You can find the current best fixed savings rates in our article Fixed rate savings bonds explained and the best cash ISA rates in our guide Best cash ISA rates – which cash ISAs pay the most interest?
Top 5 Easy Access accounts
by Raisin UK
Interest (AER): 4.87%
Interest on £5,000:
+£247
Guarantee:
£85,000
Interest (AER): 4.67%
Interest on £5,000:
+£237
Guarantee:
£85,000
Interest (AER): 4.50%
Interest on £5,000:
+£228
Guarantee:
£85,000
Interest (AER): 4.46%
Interest on £5,000:
+£226
Guarantee:
£85,000
Interest (AER): 4.39%
Interest on £5,000:
+£223
Guarantee:
£85,000
Those with longer-term savings goals – more than five years and preferably at least 10 – and who are comfortable accepting a level of risk, may want to consider investing some of their money in the hope of generating inflation-beating returns. However, remember that there’s a chance you could get back less than you put in, so investing isn’t for the faint-hearted.
Find out more about whether investing some of your savings could be right for you in our guide Investing – the basics.
What you can do
As mentioned, it’s essential to make sure your savings are working as hard as they possibly can for you, as often banks lure savers in with tempting rates only to reduce them a few months later.
Check savings websites such as SavingsChampion or Raisin, or price comparison sites such as Moneyfactscompare.co.uk, uSwitch or GoCompare to see if you can find a higher interest paying account to move to.
If you have money in a fixed rate savings account and you think you could do better elsewhere, check what the penalties are for closing your account. In some cases it may just be a few months’ interest and you may be better off moving your money to an account paying higher returns.
Savings made easy with Raisin UK
Raisin UK provides a free savings platform where you can apply to open savings accounts with over 30 banks and building societies. Enjoy competitive interest rates from FSCS-protected banks.
Your pension
If you’re approaching retirement and considering using some or all of your pension savings to buy an annuity to provide you with an income, you may want to act sooner than later, as annuity rates are likely to fall following the base rate announcement.
Holly Tomlinson, financial planner at Quilter, explained: “Annuity rates are closely tied to government bond yields, which can be influenced by changes in interest rates. A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees. Those nearing retirement should consult with a financial advisor to assess the timing of annuity purchases and explore other retirement income options.”
That said, with news that the path for future cuts will be slower than previously anticipated, many believe annuities may remain attractive for some time yet. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “With people less likely to view their pension as an inheritance tax planning vehicle they will be looking at the best way to take a retirement income and the current attractive rates will prompt more people to take the annuity route.
“It is of course vital that you check the market to make sure you are getting the best annuity for your needs. Different providers offer different rates and opting for the first quote could leave you thousands of pounds worse off in retirement. Using an annuity search engine can help you search the market quickly and easily and help you get the right product for your needs.”
According to analysis by Hargreaves Lansdown, at current annuity rates, a 65-year-old with a £100,000 pension can get up to £7,499 per year – that’s based on a single life, annuity guaranteed for five years, based on an average postcode, paid monthly in advance and with no increase.
This is close to the all-time high of £7,586 seen after the mini-Budget in October 2022.
Learn more in our guides Annuities explained and Why it pays to shop around for your annuity.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Your mortgage
The Bank’s decision to cut the base rate to 4.75% will come as a relief to homeowners, many of whom are facing a sharp jump in their monthly payments when their fixed rate deals come to an end. However, several lenders have reduced their mortgage rates in recent weeks in anticipation of interest rates being cut, so they aren’t quite as high as they’ve been previously.
Myron Jobson, senior personal finance analyst at interactive investor said: “There has been a reprieve in mortgage rates in recent months due to expectations of further cuts to interest rates as well as a fierce mortgage price war among lenders. Mortgage rates could fall further following the latest cut, offering additional relief for those in the market for a home loan to get on or climb up the property ladder.”
You can find out more about remortgaging in our article Should I remortgage now? and why mortgage rates move even when the base rate has stayed the same in our guide What are swap rates and how do they affect my mortgage?
What you can do
If you’re on a fixed rate mortgage, the base rate reduction won’t have any impact on your monthly mortgage costs – for now. If you’re on a standard variable rate, you may want to remortgage to a cheaper deal if you can find one. You may also want to start looking round for a new deal now if your current mortgage deal is due to end in the next few months, as you can usually secure your next mortgage three to six months before you want it to begin.
If you’re planning to remortgage and are looking for a place to start, we have a mortgage affordability calculator, which will give you a rough estimate of what you might be able to afford, based on current market conditions.
Once you have a rough estimate, it can be helpful to compare different mortgage options to understand what your monthly repayments are likely to be.
Unless your situation is very straightforward, you may want to seek professional advice from a broker to find the best mortgage option for you. The advantage is that they will know which banks and building societies are more likely to accept your application. It’s definitely worthwhile if you are self-employed (unless you have been so for years) or your credit rating isn’t excellent.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
If you’re finding it hard to keep up with your mortgage repayments, please don’t suffer in silence. Our article What can you do if you can’t pay your mortgage? explains what to do if you’re struggling with higher costs.
Your credit card and loans
Borrowing costs are likely to remain high for now despite the base rate reduction, so it’s important not to take on more debt if you can possibly avoid it.
Alice Haine of Bestinvest said: “Consumers should not consider a second interest rate cut as the signal to rush out and spend big in the run-up to Christmas. Running down emergency funds or borrowing to fund a major lifestyle cost should always be considered carefully to ensure repayments are fully affordable, and with the cost of servicing debt, such as loans, overdrafts and credits cards, still high, plans for major purchases placed on pause amid affordability concerns should ideally remain so.”
What you can do
If you’re paying a high rate of interest on your credit card borrowing, try and get a 0% balance transfer credit card deal, so that you can pay off what you owe without being hit by hefty interest charges. Remember though that you must try and clear your balance in full before the introductory 0% period ends, or you’ll start being charged interest.
If you can’t get one, you have the right to reject the interest rate rise within 60 days and close your credit card account. The credit card company must then give you a reasonable time to pay off the money you owe.
If you’re worried that you won’t qualify for a 0% credit card deal, there are several credit checker and credit matcher tools available – and some credit card companies will also give you an indication of whether you’d be successful before you apply.
You can find the current best balance transfer credit card and personal loan rates in our guide Balance transfer credit cards and personal loans compared.
If you have a loan which you want to pay off quickly, lenders must allow you to do this, although you may be charged an early repayment penalty to do so. Lenders can charge you up to two months extra interest if you choose to pay back your loan off sooner than planned. If your loan has less than 12 months left to run, they can only charge you a penalty of up to one month’s interest if you pay it off early.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
