Mortgages, savings and bills - what the interest rate cut means for you

UK interest rates have been cut for the second time this year, as the Bank of England forecast a “gradual” reduction in borrowing costs despite uncertainty following the autumn Budget. The Bank’s Monetary Policy Committee (MPC) announced that rates were being reduced from 5% to 4.75% on Thursday.

Governor Andrew Bailey said UK inflation falling below its 2% target meant policymakers had been able to cut rates to the lowest level since June last year. “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said. “But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”

The decision is set to relieve some pressure on borrowers who have faced elevated mortgage and loan costs since rates started rising three years ago.

Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment platform, said: “Households pinning their hopes on a second interest rate cut had their wishes met after the Bank of England reduced the benchmark interest rate to 4.75%, the second quarter-point reduction this year.

“The rate-setting Monetary Policy Committee’s decisive 8-1 vote in favour of a cut means consumers could potentially get further respite from ultra-high borrowing costs triggered by 14 consecutive interest rate rises between December 2021 and August 2023.

“Easing inflation, slowing wage growth and lacklustre growth over the summer months following a strong start in the first half of the year – all signs that high borrowing costs are having a dampening effect on the economy – offered the impetus the central bank needed to push ahead with a rate cut. Whether this will be followed up with a third rate cut next month, however, is less of a dead cert.

“Concerns that Chancellor Rachel Reeves’ spending and borrowing binge in her maiden Budget could prove inflationary – something the BoE also noted - unsettled financial markets and raised expectations that the pace of interest rate cuts may now slow. With inflation likely to edge up again in the final quarter, driven in part by a rise in energy bills from October 1, all eyes will be pinned on the BoE’s next meeting in December to see if a third rate cut materialises or whether consumers will have to be more patient for borrowing costs to ease further.

What the interest rate cut means for household budgets

“A second interest rate cut is potentially good news for households, whose budgets are in still in the early stages of recovery from the post-pandemic cost-of-living and borrowing crises. The worst of the financial squeeze may now be behind us, but the rapid price rises of the past few years are pretty much baked in.

“Add in Reeves’ raft of tax rises in the Budget and the effect of fiscal drag on people’s take-home pay, a result of frozen personal tax thresholds with more people paying higher rates of tax as their income increases, and, for many, balancing the books may still be a struggle.

“Consumers should not consider a second interest rate cut as the signal to rush out and spend big in the run-up to Christmas. Running down emergency funds or borrowing to fund a major lifestyle cost should always be considered carefully to ensure repayments are fully affordable, and with the cost of servicing debt, such as loans, overdrafts and credit cards, still high, plans for major purchases placed on pause amid affordability concerns should ideally remain so.

What the interest rate cut means for mortgages

“A rate cut could potentially deliver a boost to mortgage borrowers, particularly those weighed down by heavier repayments and first-time buyers looking to get a foot on the property ladder. High borrowing costs over the past couple of years have caused major affordability challenges for existing homeowners and prospective buyers, with mortgage rates hitting a peak in the summer of 2023 before steadily easing back.

“For existing borrowers, the rate reduction is great news for those on tracker mortgages pegged to the base rate as they will see an immediate reduction in their monthly repayment. It is less of a boon for existing borrowers locked into expensive fixed-rate deals with some time left to run, or those rolling off cheap fixed-rate deals taken out before the BoE began hiking rates who will still have to face an increase in repayments. The comforting factor is that the repayment rise may not be as heavy as anticipated.

“One concern for those looking to refinance soon is that mortgage rates may not behave exactly as they would like them to. Rising bond yields in the wake of the Budget and the US election have impacted swap rates, which underpin mortgage pricing, with some lenders recently upping rates despite an expected interest rate cut.

"Swap rates can be volatile, as they are essentially based on what markets think will happen to interest rates, so whether the markets settle in the coming days and weeks will determine what happens to mortgage rates from here.

“Those nearing the end of their product’s fixed-rate term now have a difficult decision on their hands; do they secure another fixed-rate deal, or gamble on further interest rate cuts, which may mean a tracker might work out best over the longer term? Whatever option they choose, getting advice from an independent mortgage broker is key otherwise they risk reverting to their lender’s ultra-expensive standard variable rate, with the average SVR still hovering just below the 8% mark.

What the interest rate cut means for savers

“A rate cut is less of a boon for savers who have been enjoying a savings sweet spot in recent months when easing inflation collided with still-high interest rates delivering a real return for more accounts. Those that want to preserve their return must move fast by locking in the best deal possible while interest rates remain on the higher side. This is particularly important for anyone with money idling in a current account or an old savings account offering a dismal return.

“With saving rates above the 5% mark becoming increasingly rare, those with cash to spare should act now to secure bumper returns, particularly as the value of any money not working hard will erode over time once inflation is factored in.

“While a rate cut is likely to reduce the amount of interest savers can earn, they should still be mindful of the Personal Savings Allowance, which remained unchanged in the recent Budget. The PSA became a headache for savers when savings rates ramped up because more people found themselves paying tax on the interest they earn.

“Easing savings rates won’t resolve that problem entirely, particularly for those with sizeable pots stashed away. This is why individuals are increasingly taking advantage of their £20,000 Individual Savings Allowance (ISA), with ISA deposits ramping up since the start of the tax year. This trend accelerated in the run-up to the Budget, as savers and investors fearful of major tax changes, loaded up tax-efficient ISAs and pensions, in a bid to protect as much of their wealth as possible.

“While some of those fears were not realised, such as changes to pensions tax relief, the uplift in Capital Gains Tax rates on share sales and other valuable assets means making investments more tax efficient by using ISAs and pensions will continue to benefit an individual’s overall financial position over the long term.

“Just remember that the annual ISA subscription limit at £20,000 will remain the same for a further six years. This means, along with all the other freezes in place on most personal tax thresholds, people will find more of their income and investment returns get swallowed up by tax as their income rises.

“Most savers are unable to max out their allowance in full, with the average subscription around £6,000 across all ISA types, according to the Treasury. However, that average subscription is likely to go up over the next six years as people strive to protect more of their money from tax on income and capital gains.

“Just remember to choose the right type of ISA for your savings goal. Cash ISAs can work well for short-term savings goals, such as a wedding or dream holiday, but are less beneficial for savers wanting inflation-beating returns over the longer term - something a Stocks Shares ISA is more likely to achieve for an investor with a time horizon or at least five years or more.”