This coming Thursday, August 4, the Bank of England will tell us what’s happening to the Base Rate – with some experts predicting a fall from 0.5% to 0.25%.
This would be big news for millions of Brits because mortgage interest rates and the interest paid on savings accounts is closely linked to the Base Rate.
Of course, it’s possible that the rate won’t budge from 0.5%, where it’s been sitting for over seven years.
After all, that’s what happened last month, when many economists and pundits confidently predicted a cut in the Base Rate following the EU referendum Brexit vote, only for the Bank to decide against any change.
So we don’t know for sure if the rate will come down or not.
But with a growing consensus that it’s only a matter of time before it is cut – if it’s not this month, it’s deemed likely to happen in the autumn – it’s worth considering how it would affect your family finances.
If and when the rate is cut, we've built a clever calculator that will tell how much better or worse off you'll be. Click here to try it out.
Why is a rate cut on the cards?
The Bank is concerned about the fragility of the UK economy and the uncertainty triggered by the vote to leave the EU.
Cutting the Base Rate would make borrowing cheaper, encouraging individuals and businesses to borrow and invest, creating more economic activity.
What would a cut mean for mortgage borrowers?
Where the Bank of England leads, other financial institutions follow, so what would a Base Rate cut mean for your mortgage?
It largely depends on what sort of mortgage you have.
If you’re on your mortgage lender’s standard variable rate (SVR), the rate you pay might drop in the next few months, probably by less than the 0.25% fall in the Base Rate.
But as interest rates are at historically low levels, there’s a chance your lender might not move your rate at all – it’s under no obligation to do so.
If you feel your SVR is too expensive, you could think about remortgaging onto a cheaper deal, although you would probably have to pay an arrangement fee as well as legal costs – so you’d have to work out whether moving would leave you better off.
Things are more straightforward for those with a tracker mortgage. As the name suggests, these deals ‘track’ the Base Rate whether it’s going up or down – so if the Base Rate is cut in August, you will see your monthly payment trimmed as soon as September.
The only potential blocker would be if your mortgage deal had a ‘floor’ or ‘collar’ – a point below which it could not fall. You can find out from your lender.
If you’re on a fixed-rate mortgage your rate won’t move, but you’d probably be best-off staying put, rather than moving to a deal with a lower interest rate.
This is because you’d almost certainly be clobbered by a hefty fee for pulling out of the deal early, on top of any fees attached to the new deal.
But you should watch out when you approach the end of the fixed term. At this point, your lender will more than likely shunt you onto its relatively expensive SVR, so there’s a good chance you’ll be able to find a cheaper alternative, perhaps with another fixed deal.
Is it time to fix?
In these uncertain times, there are strong arguments in favour of fixing your mortgage rate for up to 10 years.
There are a number of decade-long deals available at a locked-in rate below 3%. But be aware that you’ll need a lot of equity to put towards your new home – up to 50% of the purchase price in some cases – and you might have to pay a fee of perhaps £1,000.
The traditional warning against fixing is that you would miss out if rates fell further during the period of your fix.
But with rates already as historic lows, there really isn’t much further for them to fall.
And, of course, there is always the possibility that they might rise in the next few years. Knowing your monthly payments will remain stable could provide precious peace of mind, stabilising a big part of your family finances.
You can find out more about what’s on offer in the mortgage market here, or you can call leading fee-free broker London & Country on 0800 273 2308.
What would a cut mean for savers?
A cut in the Base Rate would be bad news for savers.
Returns on savings have been woefully low for many years. Even while the Base Rate itself has been static (since 2009), a number of banks and building societies have continued to trim the amount they pay on savings accounts, ISAs and bonds.
Few easy access accounts and ISAs are paying much above 1%, and to earn over 2% on a savings account, you have to agree to lock your money away for four years or more.
If the Base Rate falls on Thursday, banks and building societies could see it as a green light to reduce even further what they pay to their customers.
But, as a saver, there are actions you can take.
First, you should make absolutely sure you are getting the best possible return on your savings. Instead of allowing your money to languish in an account generating next to nothing in terms of interest, you should switch it to the best you can find that suits your requirements.
Most people now receive their savings interest tax-free, so it’s worth maximising what you’re paid.
Next, you should explore what’s on offer in terms of current accounts.
The latest generation of current accounts pay stacks more interest than even the best savings accounts, although only on a limited balance.
You’ll usually have to pay in a certain amount each month and run a couple of direct debits – but if you need a current account, why not switch to one that makes it worth your while?
Even if current account rates of interest decline following any Base Rate cut, they will still be streets ahead of traditional savings options.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.