The Bank of England has cut the base rate to 5%, the first time that rates have fallen in over four years.
The past couple of years have seen rates rise 14 times in a bid to curb rampant inflation, so a cut will be a huge relief to those struggling to manage steep borrowing costs. These increases (so far) have had the intended effect, with inflation easing from 2.3% to 2% in the 12 months to May and remaining at this level in June. However, it ticked up to 2.2% in July, slightly higher than the government’s long-term inflation target.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Many households will breathe a big sigh of relief after the Bank of England finally delivered its first rate cut in more than four years, a quarter-point reduction that takes the benchmark interest rate down to 5% – a level not seen since June 2023.
“The rate-setting Monetary Policy Committee’s 5-4 vote in favour of reducing the headline rate by 25 basis points, after holding it at the same level for a year, means borrowers might begin to see some respite from painfully high borrowing costs.
“Fourteen consecutive interest rate rises between December 2021 and August 2023 delivered blow after blow to household budgets already grappling with the fallout from the cost-of-living crisis.”
Here, we explain what rates falling to 5% might mean for you, and how it’s likely to impact your finances.
Your savings
Savings rates remain competitive for now, although the decision to reduce the base rate is likely to see providers lower rates. Recent weeks have already seen some returns nudge downwards in anticipation of a rate cut.
Dean Butler, Managing Director at Standard Life, part of Phoenix Group said: “While there are some cash savings deals still hovering around 5%, these are likely to fall off as banks react to today’s news and price in potential further rate drops later this year.
“It’s worth anyone with savings having a real look around at the market now. Based on the current 2% level of inflation, someone with £10,000 to save into cash who snapped up a 5% deal could see their pot worth £10,588 in real terms after two years. Someone who waited until rates dropped further and secured a 3% deal could end up with £10,189 in real terms after two years, £400 less.
“Any gains will still be relatively marginal. For those with a greater appetite for risk, investing into a product like a stocks and shares ISA offers a greater chance of substantial returns. If you’re able to take a longer-term view, saving into your pension is both incredibly tax efficient and has the potential to outpace inflation over a number of years due to the power of compound investment growth.”
As Mr Butler says, those with longer-term savings goals – more than five years and ideally 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
Lower interest rates are bad news for savers, so essential to make sure your savings are working as hard as they possibly can for you.
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, although it might be worth holding fire for a week or two to see which providers reduce their rates. Learn which providers are paying the highest returns on easy access accounts in our guide to the Best instant access savings accounts. If you’re looking for a cash ISA, you can find the best rates in our article Best cash ISA rates – which cash ISAs pay the most interest?
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. As mentioned you can find the current best fixed rate savings rates in our guide Fixed rate savings bonds explained.
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 have been reduced definitely won’t be music to your ears.
According to analysis by Hargreaves Lansdown, at current annuity rates, a 65-year-old with a £100,000 pension can get up to £7,217 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 slightly below the £7,586 highs of October 2022, but higher than the £6,782 in May 2023.
This month’s rate cut, combined with the prospect of further reductions to come, means that annuity incomes are likely to fall back. This means it could pay to secure an annuity deal sooner rather than later, although you should seek professional advice if you’re not sure it’s the right decision for you.
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 1,000 reviews on VouchedFor, the review site for financial advisors.
Your mortgage
The Bank’s decision to cut the base rate will be a huge relief for countless homeowners, many of whom are facing a sharp jump in their monthly payments when their fixed rate deals come to an end.
Sarah Pennells, consumer finance specialist at Royal London said: “This is the first time the rate has reduced since it was dramatically cut to 0.1% in April 2020 and will be welcome news for mortgage holders who will now be hoping this rate cut is followed by others in the coming months. We know that many homeowners have been struggling with the effects of high interest rates.
“Our latest financial resilience research showed that those with a mortgage have been paying £362 more in housing costs a month when compared with the same time a year ago. Worryingly, 1 in 8 of those whose mortgage costs had risen were planning to use either a credit card or overdraft to cover the additional cost.
“Ahead of this reduction, lenders have been making cuts to the on-sale mortgage rates with a number of big-name lenders announcing lower rates through the last week. This will be a welcome reprieve for borrowers who were worried about remortgaging to a, possibly, much higher rate.”
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
The fact that rates have bern cut means that hopefully we may see a slight reduction in the cost of other types of borrowing, such as loans, credit cards and overdrafts. However, borrowing costs are very unlikely to reduce substantially, so it’s important not to see this as an opportunity to take on more debt.
Alice Haine of Bestinvest said: “ High living and borrowing costs over a sustained period have created major affordability challenges for buyers trying to secure a mortgage and caused more people to take on credit putting them at the mercy of the high interest charges on that debt.
“Consumers should not view an interest rate cut as a green light to rush out and spend on big-ticket items such as holidays, car upgrades or new kitchens. 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 that have been on hold amid affordability concerns should ideally remain on pause.”
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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