In August last year (2016), UK Interest Rates hit a record low at 0.25% in the first cut in interest since 2009. A year on, I am revisiting how almost all of us have and will be impacted by this from mortgages to pensions. How will this affect you?
The interest rate cut benefits those looking for a mortgage and potentially those who already have one depending on the type.
People on tracker mortgages (that track the Bank of England base rate) will benefit from the cut immediately, seeing their monthly mortgage repayments fall. Base mortgage rates, set 2% above the Bank base rate, will see their repayments drop from 2.5% to 2.25%. Borrowers should check with their lenders as some use their own version of base rate which, may not have to mirror the Bank of England’s rate. Other mortgages may have a “collar” – a limit below which rates cannot go.
Variable rate mortgages – rates should fall however, there may be a slight delay for lenders to pass on the reductions.
Those on fixed-rate deals, which are now the vast majority of new loans, will not benefit from the reduction until their current deal expires.
For those who are looking to buy there should be some good deals and new fixed rates available. However this does not necessarily mean that it will be easier for first time buyers to get onto the property market.
This does however, present a brilliant opportunity for those with mortgages whose rates have expired to re-mortgage and take advantage of these historically low rates. Or for those with interest only mortgages to convert to repayment mortgages at a more affordable rate.
Savings rates have fallen to new lows and there have been rumblings regarding the impact of a negative base rate on bank charges. Not a brilliant time for savers who may therefore want to look for alternative options.
Falling base rates mean the interest rates charged on government borrowing tends to drop, which can impact company pension schemes (aka Final Salary Schemes/Defined Benefit schemes).
This would impact the pension scheme itself by potentially causing bigger deficits and therefore the Company who will be required to plan to cover these shortfalls. In reality, this should not impact pension scheme members unless this means that the pension scheme has to go into the pension protection fund which is an extreme and unlikely to be solely due to the change in interest rates.
For individuals who have pensions that are invested in shares they could see an increase in their fund values, as these tend to generate higher returns when rates are cut.
Individuals looking to buy a fixed retirement income via an annuity could see the rates drop as these too tend to be linked to interest rates on Government Bonds.
Share prices tend to go up following a cut in the Bank of England base rates, so if you have investments held in stocks and shares, you could see your fund values go up which many have over the last 12 months.
If you have any questions regarding how the Base Rate change may affect you or to take advantage of this or explore new investment opportunities, do contact me.