This week, the Bank of England announced that interest rates would be cut to 0.1%, representing the lowest rate there has been since the Bank opened 325 years ago. The rate had already been cut from 0.75 to 0.25% last week, as part of a range of financial measures designed to help both individuals and businesses deal with the strain caused by COVID-19.
So, what does this mean for you? Well, broadly speaking it’s good news for borrowers and bad news for savers – but let’s take a look at some of the specific outcomes that might affect you and your family.
The announcement is particularly good news for those people with tracker mortgages – mortgages with interest rates that follow the Bank’s base rate. If this is you then ask your bank when the new rate is going to be applied, as it’s likely to represent a significant monthly saving.
For Standard Variable Rate mortgages, lenders don’t have to pass on the interest rate cuts, but in practice many of them will. You’ll be informed by your bank if your mortgage payments are going down.
Finally, those on Fixed Rate mortgages won’t feel any benefits from this; as the name suggests, your interest rates are fixed and don’t change based on the Bank’s base rate. However, the government have also backed mortgage holidays of up to three months for struggling households, so if you do find yourself struggling over the coming months then you may well have recourse.
While there’s a chance that you’ll be paying less on your mortgage in coming months, you’ll also be earning less on your savings. Cuts to the Bank’s base rate are usually passed on to savers in the form of interest rate cuts, meaning that many banks will likely start offering savers even smaller returns on their savings. They do have to give you at least two months’ notice before changing your rate.
You can get around this by making sure you’ve got a fixed rate savings account. If you have been thinking about opening up a new savings accounts then it would be better to do it sooner rather than later, as you’re likely to see far less generous rates on offer in the coming day and weeks.
Credit cards and overdrafts
The Bank of England’s base rate is only a small factor when it comes to the interest rates set for credit cards and overdrafts. This means that the fees you pay to your bank for borrowing are unlikely to be affected by the recent cut.
Don’t despair, though, as lenders have already started to offer their customers some options for increased flexibility while dealing with the COVID-19 pandemic. This includes repayment holidays and waived fees as well as emergency credit increases.
In all cases, you should wait to hear from your financial service providers to find out exactly how the changes are going to affect you. If there’s anything that you’re still unsure about, contact them directly to get clear answers and discuss your options.