An emergency cut in interest rates has been announced by the Bank of England to provide support amid the coronavirus crisis. The base rate has been reduced from 0.75% to 0.25%, pushing it back to the lowest level in history. With this in mind, how will this affect your personal finances?
Governor Mark Carney has released a statement predicting that the economic impact caused by coronavirus could be ‘large and sharp’. He stated that the cut has been put in place to ‘help to support business and consumer confidence at a difficult time and bolster cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance’ (The Bank of England).
The base rate is The Bank of England’s certified borrowing rate, which is what they charge lenders when they borrow money. When the base rate fluctuates, lenders will often pass these costs on to customers by altering their own interest rates on loans.
Effectively, the base rate will impact how much interest you can earn on your savings and how much it will cost you to borrow money.
How will my mortgage be affected?
Your payments will be affected by the cut depending on what type of mortgage you have.
If you have a fixed rate mortgage, your monthly outgoings will not change. If, however, you have a standard variable rate (SVR) then your monthly payments could be impacted. An SVR is a mortgage that is based off the interest rate, after your initial fixed mortgage rate ends.
Those that are on tracker mortgages, which ‘track’ the best rate, are most likely to see their monthly payments decrease.
If your deal has what is called a ‘collar’, this cut will not impact you. A ‘collar’ is put in place to prevent rates falling below a certain level.
How will my savings be affected
In theory, a bank rate cut encourages consumers to invest their money, as their mortgage bills drop and the return on their savings worsens. Hence, there is a boost to the economy.
One thing to consider is that the cut is not automatic. However, it is important to be vigilant.
For savers who shop around the market and invest their money with banks with higher interest rates, it is advisable to keep an eye on these rates. You can expect these rates may be removed and repriced in the coming days.
Sally Francis, money expert at MoneySuperMarket suggested how savers should respond to the interest rates cut, stating: “people will need to compare rates and make sure their money is earning the best return possible in this low interest rate environment. Monitor your rate, compare other rates, and switch when your accounts aren’t paying the top rates available.”
For individuals with conventional bank accounts at larger banks, there isn’t much more they can cut. Most banks already pay less that 0.5%. For an example, HSBC’s popular Flexible Saver account pays either 0.1% or 0.15%.
There are worries that the banks may go negative, after banks in Switzerland and Denmark have applied this to some customers with large balances. However, Patrick Collinson has predicted that saving rates on mainstream accounts in the UK will more likely fall to zero (The Guardian).
How will this affect my pension?
Pensions and other investments are long-term projects, so the long-term health of the economy is an important element to consider. The latest change in the interest rate could pose challenges for those approaching retirement.
The recent fall in the stock market will mean those whose pensions is primarily invested in stocks and shares will have seen their pension pot fall in value.
Those who are buying an annuity from their defined contribution pension pot may also face challenges.
A more positive note is that share prices have been driven up by the Bank’s decision. This means those still paying into a private pension will see a boost in the value of these investments.
KLO Financial Services
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