Bank of England interest rate decision confirmed – what it means for you
THE BANK of England has opted to hold interest rates after cutting them for the first time since 2020 last month.
At the Monetary Policy Committee’s (MPC) meeting today, ratesetters at the BoE held the base rate at 5%.
Most economists had predicted the central bank to keep interest rates the same.
The central bank cut rates from 5.25% to 5% in August, the first reduction since 2020 and a boon for squeezed borrowers.
Andrew Bailey, governor of the Bank of England, said on Thursday: “Inflationary pressures have continued to ease since we cut interest rates in August.
“The economy has been evolving broadly as we expected.
“If that continues, we should be able to reduce rates gradually over time.
“But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
Today’s decision comes with inflation staying just above the BoE’s 2% target.
The BoE raises or lowers its base rate, which dictates what interest rates are charged to banks, in order to control inflation.
By raising it, it is supposed to make the cost of borrowing more expensive and control spending, therefore driving down inflation.
The BoE started raising its base rate in December 2021 as the UK economy emerged from the coronavirus pandemic.
A succession of rate rises followed as the bank looked to slow rampant inflation brought on partly by soaring wholesale gas and electricity prices.
It has seen mortgage rates go up for millions of households – adding thousands of pounds to some bills.
But the upturn in the base rate has also seen rates on savings accounts pushed up.
With inflation slowing, economists are predicting the BoE will bring interest rates down next year.
The International Monetary Fund also previously predicted that the BoE will cut its base rate to 3.5% by 2025.
In any case, here is what today’s decision means for your money.
Mortgages
If rates are held mortgage rates usually do not change very much but we’ve been seeing fixed rates come down in recent weeks as lenders battle it out.
Today’s announcement means that those on tracker or standard variable rate mortgages won’t see any change to bills.
Mark Harris, chief executive of mortgage broker SPF Private Client, said: “Lenders are reducing their mortgage rates regardless as they compete for business.
“Mortgage rates continue to soften, with Santander introducing a sub-4 per cent two-year fix on the back of the lowest two-year Swap rates in two years.
“There are also plenty of five-year fixes at sub-4 per cent for those looking for certainty over a longer period.
“While rock-bottom rates have long gone, these reductions in mortgage rates are giving borrowers some comfort after a prolonged period of rising pricing.
“Competition between lenders is likely to mean further gentle reductions in mortgage rates as they vie for new business.”
Last week, Barclays and TSB slashed rates on home loans for buyers with a 5% deposit by up to 0.4 percentage points.
Credit card and loan rates
There is unlikely to be any change after today’s announcement.
If the base rate is changed, the cost of borrowing through loans, credit cards and overdrafts can go up when they rise and sometimes borrowing will get cheaper if they fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
With rates held, any rates you are paying on credit cards and loans are unlikely to change for now though.
Savings rates
Savers are the main group to have benefited after the consecutive rate rises.
This is because banks tend to battle it out to offer market-leading rates.
That said, banks are usually much slower to pass on higher rates to savers.
Savers are being warned that top rates are at risk of disappearing as further rate cuts loom.
Adam Thrower, head of savings at Shawbrook, said: “Savers have a prime window to lock in higher savings rates as the Bank of England holds rates this month—but time is running out.
“With rates likely set to fall soon, the next few months are crucial for securing inflation-beating returns.
“Demand for long-term fixed rate accounts is growing, but near-retirees (aged 55 to 68) may be missing out.
“Our research shows only 18% see these accounts as a source of regular income, yet 34% want their savings to boost retirement funds. Locking in now could be a smart move for financial security.”
Pensions
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.
But because annuity rates are linked to the cost of Government borrowing, any rise or fall in the BoE’s base rate can have an impact on 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.
But with interest rates unchanged, pensioners will still be able to secure favourable rates.
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.
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