It was announced this week by the Bank of England that interest rates have been cut to 0.25%.
This record low is the result of the first decrease in interest rates since 2009, and has raised many questions about how individuals’ finances will be affected. Mark Carney, the governor of the Bank of England, has called on banks to pass the interest rate cuts on to their customers, however not all banks have obliged.
Savings, mortgages and pensions are all likely to be affected by the cut, but what will this mean for you and your family in real terms?
The decision to cut interest rates to 0.25% is bad news for savers, however as rates were already extremely low at 0.5%, this latest decrease shouldn’t make too much of a difference. Savings interest rates reflect the amount of money you will receive back on top of the amount that you save. So for instance if you save £100 in an account with 0.25% interest, over the course of the year you will have earned just 25p.
Interest rate cuts are good news for those with mortgages. On a typically priced home of £211,000, this latest cut would result in a £22 monthly reduction on a £779 bill (on a variable 25-year repayment mortgage, assuming a deposit of 20% has been paid). Depending on the type of mortgage, savings could be bigger or smaller than this. Those with bank rate tracker mortgages for instance are likely to see an immediate decrease as these mortgages directly correlate with the Bank of England’s interest rate. The BBC explain how the different types of mortgages will be affected in detail.
While state pensions will not be affected, defined benefit pension schemes could be put in jeopardy as businesses face pressure to make up the shortfall that decreased interest rates produce or reduce the availability of these pensions altogether. Annuities will be worse off too, but as share prices have risen, those paying into a private pension (and investors) will see an increase in the value of their investments. For long term investments like a pension, it is always important to consider the larger financial outlook.