MILLIONS of mortgage bills are set to fall after the Bank of England cut interest rates this afternoon.
During today’s Monetary Policy Committee (MPC) meeting, the Bank of England’s (BoE) policymakers voted to lower the base rate from 4% to 3.75%
It is the sixth reduction since 2020, following a hold at 4% in September and November after a cut from 4.25% in August.
Members of the nine-strong MPC voted five to four in favour of cutting the baser rate.
Governor Andrew Bailey changed his view and voted for a cut, tipping the balance on the committee.
He said: “We still think rates are on a gradual path downward.
“But with every cut we make, how much further we go becomes a closer call.”
Chancellor Rachel Reeves said: “This is the sixth interest rate cut since the election – that’s the fastest pace of cuts in 17 years, good news for families with mortgages and businesses with loans.
“But I know there’s more to do to help families with the cost of living. That’s why at the Budget we froze rails fares and prescription charges, and will be cutting £150 off the average energy bill next year.”
The decision means lower mortgage payments for homeowners but could also lead to smaller returns for savers.
Money markets expected the interest rate cut based on recent data showing falling inflation, slower wage growth, and a weakening economy.
This decision followed the latest inflation figures, which showed a bigger drop than analysts had anticipated.
According to the Office for National Statistics (ONS), the Consumer Prices Index (CPI) fell from 3.6% in October to 3.2% in November.
This decline was largely driven by food and drink inflation, which dropped from 4.9% to 4.2%.
Prices for alcohol and tobacco also eased during this period.
The Bank is responsible for bringing inflation down to a 2% target, and this latest fall brings it closer to that goal.
At the same time, the country is struggling with rising unemployment and falling GDP.
Official figures showed the UK economy shrank by 0.1% in October, following a 0.1% decline in September.
Most economists had expected a 0.1% rise in October, hoping for a manufacturing bounceback as Jaguar Land Rover recovered from a major cyberattack.
However, the ONS also reported that the unemployment rate rose to 5.1% in the three months to October, up from 5% in the previous period.
By lowering interest rates, the Bank makes borrowing cheaper to encourage consumer spending and business investment to support economic recovery.
SUN ECONOMICS EDITOR AT BANK OF ENGLAND
By Ryan Sabey, Economics Editor and Deputy Political Editor:
Homeowners will be raising a glass this Christmas to Bank of England governor Andrew Bailey after this interest rate cut.
The Bank chief proved to be the decisive vote in a narrow 5-4 decision – to lower rates to 3.75% – on the nine-member panel of decision makers.
Mr Bailey still believes rates are still on a gradual downward path.
However, he adds that how much further the bank goes then becomes a “closer call”.
That could see rates eventually get down to 3.25 per cent next year.
He revealed the inflation peak has passed and risks of it getting higher have eased.
This will again be good news for consumers in the coming months on both their food shops and day-to-day purchases.
But he warns of wage growth in the coming months which comes as public sector pay deals are handed at the start of next year.
For those with a keen eye on getting down to the 2% inflation target, the Bank now expect it to be hit closer to this in April.
The Bank’s call to lower interest rates today also tacitly welcomes moves made by the Chancellor Rachel Reeves at the Budget.
The minutes of the Monetary Policy Committee say the set of measures are likely to lower inflation in April by 0.5%.
Cuts to energy bills by £150 and fuel duty have all given the Bank a nudge in the right direction.
When you combine the Budget measures along with wage growth easing, a stuttering economy and weakening labour market, the way was paved for the interest rate cut.
But in the monthly agents’ summary of business conditions, the outlook for employment looks more bleak.
It adds that firms are being “cautious” and there is uncertainty around Christmas trading.
Warning signs are flashing around higher labour costs and the new employment rights legislation that is likely to see some firms lower their headcount.
Here’s how today’s decision affects your money.
Millions will see mortgages fall
When interest rates fall, mortgage rates typically follow suit.
That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.
However, the timing of when you will see the reduction depends on the type of home loan you have.
Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.
There are 591,000 customers on tracker mortgages and 540,000 on SVRs.
A 0.25% cut to base rates would mean an average SVR mortgage would fall by £166 a year (£13.87 a month), while those on tracker deals will see a £350 a year (28.97 a month) drop, according to UK Finance.
However, most mortgage holders, more than 7.1million, are on fixed deals so they won’t see any change until their deal ends.
Experts don’t expect rates to return to the record lows of 1-2%, but lenders have recently been cutting rates, with two-year deals now at their lowest in three years.
A typical two year mortgage now has an interest rate of 4.82%, down from 5.12% in June, according to MoneyfactsCompare.
Meanwhile, the average five-year deal is 4.90%, after falling from 5.09%.
Lenders have already slashed mortgage rates earlier this month in anticipation of a base rate cut.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Credit Card APRs could go down
When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
These cuts don’t happen as quickly as mortgage rates and we might need to see several rate cuts before they start to fall.
Also multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.
Rachel Springall, finance expert at moneyfactscompare.co.uk, said: “Lenders traditionally reassess the rates they charge on debts as a reflection of their attitude to risk, as when the risk of defaults is elevated, the cost to borrow would usually rise.”
Your lender will let you know before making any changes.
How can I find the best credit card rates?
YOU should always use an eligibility calculator before applying for credit.
That’s because every credit card application leaves a mark on your credit file and can affect your credit score.
To assess all the available cards, visit price comparison websites like MoneySavingExpert’s Cheap Credit Club or Compare the Market.
Once you run your details through an eligibility calculator and you’ve been shown that you’re likely to be accepted, make a formal application.
To do this, you will need to provide your name, address and email address as well as details of your income so a provider can assess your eligibility.
You will also need to provide details of how much money you want to transfer to the new card, but you can often do this after you have been accepted.
If your application is approved, you will need to transfer the balance within a set period, usually around 60 or 90 days.
Your old balance will then be cleared and you can start making interest-free repayments on your new card.
Rate cuts add pain for savers
While rate rises have been painful for borrowers, savers have benefited from them.
This is because banks tend to battle it out to offer market-leading rates.
However, banks are usually much slower to pass on higher rates to savers.
When interest rates are cut, savings accounts usually offer lower returns.
Since November 2024, average rates for easy access and notice accounts have declined.
The average easy access rate dropped from 3.03% to 2.52%, while notice account rates fell from 4.22% to 3.95%.
Rachel Springall, finance expert at moneyfactscompare.co.uk, said: “Savings rates are getting worse and base rate reductions spell further misery for savers.
“It is essential that savers do not wait around for too long to snap up the top rates on the market, particularly if they use their pots to supplement their monthly income.
“Loyalty does not pay, so it is crucial savers look towards building societies and challenger banks for better savings returns.”
Luckily, some savings accounts still pay up to 5%.
For example, Cahoot’s Sunny Day Saver offers 5% interest, and you can start saving with just £1.
If you save £5,000 in this account for a year, you’ll earn £250 in interest.
But don’t expect these deals to last for long.
How can I find the best savings rates?
WITH your current savings rates in mind, don’t waste time looking at individual banking sites to compare rates – it’ll take you an eternity.
Research price comparison websites such as Compare the Market, Go Compare and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 3.2%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.
Annuity rates may fall
The BoE’s base rate also impacts pensioners looking to buy an annuity.
A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.
However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE’s base rate can impact the rate you receive.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
However, Holly Tomlinson at Quilter said: “Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes.
“A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.
“Those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.”