The Bank of England’s Monetary Policy Committee voted by 8-1 in September to leave the base rate unchanged at 5%.
Whilst the news is positive for savers who currently have a wide choice of accounts offering inflation-beating returns, it is disappointing for homeowners on tracker and other variable mortgages, as they won’t see any reduction in their monthly costs.
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, the Committee decided against a cut this month.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Consumer Prices Index (CPI) inflation may have held firm at 2.2% – just above the Bank of England’s target of 2% – but an uptick in core and services inflation in the 12 months to August, a reflection of underlying price pressures, is likely to have been concerning for the central bank, particularly after rolling out such as aggressive tightening strategy to keep price rises in check.
“Flat economic growth in June and July, following a strong start to the year, along with easing wage growth and falling vacancy rates are likely to have complicated the decision for the central bank – as it signals that high borrowing costs are having a dampening effect on the economy. Prolonging this era of high interest rates by keeping rates on pause risks crimping the economy even further.”
Here, we explain what rates remaining at 5% might mean for you, and how it’s likely to impact your finances.
Your savings
Savings rates remain competitive for now, but the prospect of rate cuts 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: “As the base rate remains at 5% for now, savers may be hopeful that rates will stabilise and that any reductions will slow. However, it’s still crucial that they review their existing accounts and act quickly if they think they could be earning more interest on their money. There are still some competitive accounts to choose from, but it’s impossible to know how long they will be available for.
“There is an expectation that the base rate will be cut twice more before the year is over, so savers need to prepare themselves for more interest rate cuts. Those who are happy to lock their cash away for a guaranteed return could look towards a fixed rate bond or fixed cash ISA, and with rates expected to decrease further, savers may wish to choose a longer-term deal.”
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?
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, even though interest rates haven’t changed, 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.
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, then the fact that interest rates remain unchanged is positive.
According to analysis by Hargreaves Lansdown, at current annuity rates, a 65-year-old with a £100,000 pension can get up to £7,102 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 below the £7,586 highs of October 2022, but higher than the £6,782 in May 2023.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “We are expecting further interest rate cuts to come in the coming months and when they do, we could see annuity rates start to fall. It’s unlikely to be a steep or sharp fall as we won’t see interest rates cut anywhere near as quickly as they were hiked. We also aren’t expecting a return to the ultra-low interest rates of the past. However, the prospect of falling incomes will be enough to persuade those who had hesitated to take the plunge, to go ahead and buy an annuity, contributing to what will surely be a bumper year for the market.
“Anyone looking to secure a guaranteed income should make sure they use an annuity comparison tool to make sure they get the latest rates from across the market. Rates can vary between providers and once bought an annuity cannot be unwound, so it pays to see what the whole market can offer you before taking the plunge.”
Learn more in our guide Why it pays to shop around for your annuity.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with 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 hold the base rate at 5% will come as a blow 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: “Those in the market for a mortgage, whether they are prospective buyers or homeowners approaching the end of their fixed-rate deal, will be encouraged by the flurry of mortgage rate reductions in recent weeks.
“With the Bank of England indicating that further rate cuts are likely before the year is up, many will be holding off until the last possible moment to secure the best deal. The harsh reality for those looking to remortgage is that new deals will be far from the attractive rates of yesteryear.”
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 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 remain high with the base rate unchanged, so it’s important not to take on more debt if you can possibly avoid it.
Alice Haine of Bestinvest said: “While no change in the headline interest rate is still infinitely preferable to another hike, those looking to spend on big-ticket items such as holidays, car upgrades or house renovations would be wise to tread carefully. The cost of servicing debt remains high, so repayments must be affordable and balanced out with a robust emergency fund that can be dipped into should an unexpected change in the family finances occur, such as the main breadwinner losing their job.”
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.
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