- Bank of England cuts base rate from 4.25% to 4%
- Voting was 5–4 in favour of a cut
- Fixed-term mortgage rates likely won’t drop as a result of today’s cut
- Savers should switch and consider ISAs
Laura Suter, director of personal finance at AJ Bell, comments on the latest Bank of England rate cut:
“Today’s cut takes base rate down to a near two-and-a-half year low, bringing it in line with interest rates in March 2023, when rates were still on their climb upwards and inflation was clocking in at a whopping 10.1%. Despite the recent jump in inflation, the environment feels different now, with that CPI inflation figure having dropped from its previous highs down to 3.6%.
“The MPC were fairly split in their decision, with four members voting to keep rates at 4.25%, while another four voted to cut to 4% and one other member wanted a meatier cut to 3.75%. This far-from-unanimous vote may spark some concern in markets about the future path for rate cuts. The market is pricing in another cut in November and again in February, to bring base rate to 3.5%. But with huge uncertain elements looming in the next few months, from Trump’s tariffs to the Autumn Budget, there are plenty of things that could move rates from here.”
Mortgages
“Any homeowners who are hoping that today’s cut will mean an immediate drop in rates could be disappointed. Today’s rate cut was widely expected, meaning that markets have priced in the rate cut for some time. It means that the chop to rates today is already reflected in fixed-term mortgage rates. Barring any bond market turmoil off the back of any comments made by the MPC today, we’re unlikely to see a dramatic move in mortgage rates.
“But despite that, homeowners who are coming off a two-year fix could see a chunky drop to their monthly payments. Moneyfacts data shows that the average two-year fix in August 2023 was 6.85%, which has now dropped to 5% today. For someone with £400,000 of borrowing that equates to a £451 a month drop in their repayments – or just over £5,400 a year*. Even those with a smaller mortgage will see a noticeable drop in their monthly costs: someone with a £125,000 mortgage would see costs drop by around £1,700 a year.
“Those on a variable rate deal or who have fallen on their lender’s standard variable rate will see their monthly repayments drop thanks to today’s cut – although not by a huge amount. For someone with £125,000 of mortgage borrowing*, the 0.25 percentage point cut means a £17 a month saving on their bill, while for those with £400,000 of mortgage borrowing a 0.25 percentage point cut means a £56 monthly saving – or almost £700 a year.”
*Based on a 25-year repayment mortgage.
Savings
“In a falling interest rate world, savers need to get into the habit of switching accounts to chase the best rates. With a top easy-access rate of 5.1%, it’s still very possible to nab a decent return for your cash that’s above both inflation and base rate. But average savings rates have been dropping and providers have been cutting their offerings, meaning savers can’t just leave their cash in an account they switched to a year ago.
“However, nabbing a decent savings rate is a double-edged sword, as it means many more savers are being handed a tax bill for their savings interest. At that top easy-access interest rate, basic-rate taxpayers would only need £19,600 in savings before they hit their tax-free limit. For a higher-rate taxpayer that sum halves to just £9,800 before they will face tax on their savings. Our FOI this week showed that one in 15 taxpayers are expected to pay some tax on their savings in the current tax year. And HMRC estimates that Brits will earn around £20 billion from interest on non-ISA cash accounts this year – leading to a £6 billion tax bill for the nation.
“Cash ISAs remain a solid option to avoid this tax bill, but with a top easy-access rate of 4.67% for a Cash ISA savers need to weigh up whether the lower interest rate cancels out the tax saving. If you’ve already hit your tax-free personal savings allowance then the lower Cash ISA rate would leave you with more interest than the taxable non-ISA account, whether you’re a basic-rate or higher rate taxpayer.”
