Bank of England base rate drops to 0.25%Which? explains how this will impact your finances
04 August 2016
The Bank of England has slashed the base rate today from the previous historic low of 0.5% to a record-breaking 0.25%.
The base rate reduction is intended to stimulate the economy, encouraging banks to lend more and consumers and businesses to borrow and spend rather than save. This could help counteract the slowdown in UK markets that's happened as a result of the uncertainty triggered by the Brexit vote.
Below, we outline the implications for mortgages, savings, investments and shares.
What is the Bank of England base rate?
The base rate is set by the Bank of England and affects interest rates on everything from mortgages to savings accounts.
Each month, the Monetary Policy Committee (MPC) decides whether the base rate will stay the same, increase or fall, depending on various economic factors.
The base rate had stood at 0.5% since 2009 until today, when it was reduced to 0.25% - the lowest it's ever been.
Find out more: Bank of England base rate - watch our video to learn all you need to know in under two minutes
How will the base rate cut affect mortgages?
Already at record lows, mortgage interest rates could fall further in the next few weeks. Whether you're affected will depend on what type of deal you're on:
- Tracker mortgages move in line with the base rate so today's rate reduction may trigger an imminent cut.
- Standard variable rate (SVR) mortgages are not directly linked to the base rate but rates may well fall if lenders want to pass on the cut to borrowers.
- Fixed-rate mortgages will remain unchanged until the end of your deal.
If you are in a position to remortgage, there could be some cheap deals on fixed-rate loans coming up. Timing is an important consideration though: five and 10-year loans offer more certainty but lock you in for a long time, often charging hefty early redemption fees.
Fixing for a shorter period could potentially mean you have to remortgage at the point when we're leaving the EU, which may be another uncertain time for the market. This, in turn, might make it harder to get a mortgage at that point.
- The best type of mortgage for you will be heavily dependent on your personal circumstances. Call Which? Mortgage Advisers on 0808 252 7987 for personal, impartial advice
How will the base rate cut affect cash savings?
A base rate cut could be a blow for cash savers as rates may be dragged down further still.
If you want certainty going forward, fixed-rate savings bonds are one option. These typically come with higher interest rates than instant-access, notice or regular savings accounts and can extend over a period of between one and five years.
We've listed some of the best deals currently on offer below. We have excluded accounts with certain qualifying conditions and restrictions on withdrawals. Click the links to find out more with Which? Money Compare.
- Best three-year fixed-rate Isa: Shawbrook and Paragon Bank, both 1.7% AER
- Best three-year fixed-rate savings account: Paragon Bank, 2% AER
- Best five-year fixed-rate savings account: Paragon Bank, 2.3% AER
- Best five-year fixed-rate cash Isa: United Trust Bank, 1.95% AER
However, as savings rates are so low, it could be a good time to consider alternatives such as high-interest current accounts. Top rates available include:
- 5% on balances up to £2,500 with the Nationwide FlexDirect Account for one year
- 3% on balances of between £1,000 and £20,000 with Santander 123 - but this carries a monthly fee of £5
Find out more: best bank accounts for customers who are in credit - find a great deal
How will the base rate cut affect investments?
The reduced base rate could lower the value of the pound compared to other currencies. This would mean that UK companies that make revenue outside of the country - in euros or dollars for example - would be in line for boosted profits and their share prices could rise in anticipation.
On the other hand, smaller companies that make their money here will see the cost of imports going up, and profits therefore going down.
Because the UK relies so heavily on imports, a weaker pound means the cost of living could rise due to higher inflation. If inflation goes up, the buying power of the pound falls.
Lower rates also make cash a less attractive investment because it makes less in interest. If you're considering moving your assets from cash into the stock market, be aware that this means taking on significantly more risk. You should always avoid investing more than you could afford to lose.
Should I buy shares?
If this all happens - and there are many uncertain influencing factors at play here, so nothing's guaranteed - then your cash would be worth less both abroad (in foreign exchange terms) and here in the UK (in interest and buying power terms).
You may reasonably be tempted to move some of your cash into shares, if you can afford to put that money at risk. But remember that shares are risky and both currencies and share prices fluctuate - in other words, share prices may go down as well as up.
If you were happy with your balance of asset types before, you should think carefully before taking on more risk. But if you're desperate to put your money to work and you can afford to take on the associated risks, you could consider shifting over to shares.
Find out more: for financial guidance from our team of impartial experts, call the Which? Money Helpline
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