S Poddar
The Bank of England has lowered interest rates from 4.75% to 4.5%, marking the lowest level since mid-2023. This decision has significant implications for homeowners, borrowers, and savers across the UK, influencing mortgage payments and returns on savings accounts. While some individuals may benefit from reduced borrowing costs, others may see little to no change in their financial obligations.
For most mortgage holders, the rate cut will not bring relief right away. Most homeowners have fixed-rate mortgages, meaning their monthly payments are unaffected by shifts in the base rate. But for those who have base rate tracker mortgages, whose borrowing costs are directly linked to the Bank of England’s rate, there will be a decrease in the borrowing cost. Additionally, borrowers on standard variable rates may or may not benefit from the cut as the lenders are not obligated to pass it on. Shortly after the Bank’s statement, Santander said it would introduce the full rate cut to its variable-rate mortgage customers beginning early March. This implies the bank’s standard variable rate will now drop to 6.75%, and tracker mortgages will decrease with that rate. Meanwhile, some of its customers, who will switch from their existing deals, will see their rates shift to 7.75%. That does provide some form of relief but will only leave fixed-rate mortgage holders to wait for the changes in the market trends to affect them.
Fixed-rate mortgage prices are more sensitive to forward interest rate expectations than to current movements in the base rate.
Many lenders had actually been pricing in several cuts over the course of the year already. Yorkshire Building Society, for example just cut by up to 0.31%, although it was on bigger discounts for borrowers with a 40% deposit. Their 90% mortgages received much smaller cuts of up to 0.17%. A two-year fixed-rate mortgage at 75% loan-to-value for those remortgaging now stands at 4.39%. Quilter financial advisers financial planner Holly Tomlinson said some lenders may offer more appealing fixed-rate deals in the coming weeks. However, she said most new mortgage offers have already priced in the latest rate cut. The fact that two economists voted for a more aggressive 0.5% reduction suggests markets may be anticipating further rate cuts, which may bring mortgage rates lower in the near term.
The impact on savings accounts will differ. Savings rates are not directly linked to the base rate, but many savers—particularly those with easy-access accounts—are likely to face reduced returns. Some savers have already had cuts following the Bank’s last rate cut in November. Fixed-rate savings accounts, like fixed-rate mortgages, are priced with regard to expectations of the future. Currently, the average rate for a one-year fixed-term savings account sits at 4.2%, slightly below the base rate.
Despite the falling rates, some of the banks-newer ones and some of the older ones—are still offering quite competitive savings deals to attract their customers. The Raisin UK, for instance, gives a 4.67% return on one-year fixed-rate bond. The message here is to shop around for the best available rates.
Financial analyst Andrew Hagger advises savers to stay proactive. He advises them to compare top savings accounts and switch if a bank is offering a subpar rate. He also recommends locking in rates on fixed-term bonds or ISAs now before further rate reductions take effect.
Overall, this decision by the Bank of England is a result of persistent economic difficulties and further expectations of decelerating growth. Although those who have taken variable rate mortgages may enjoy this, fixed rate customers will only be able to look forward to future adjustments. Meanwhile, savings accounts holders will have to watch out for such changes and react to maximize return wherever possible. This rate cut is just part of a more complex economic setting that will evolve in the following months.
