INTEREST-ING
Millions of mortgages bills to FALL as Bank of England interest rate decision confirmed – what it means for you
Watch our video below on what the BoE base rate means for you
MILLIONS of mortgage bills are set to fall after the Bank of England confirmed a cut to interest rates.
During today's meeting of the Monetary Policy Committee (MPC), the BoE's rate-setters reduced the base rate from 5% to 4.75%.
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The base rate is used by lenders to determine the interest rates offered to customers on savings and borrowing costs including mortgages.
This reduction means that millions of mortgage holders are set to see their bills fall.
It's only the second cut since 2020 but Brits may now have to wait longer for another rate cut next year as the Budget raised the risk of inflation remaining higher for the next three years.
Eight of the MPC members voted to cut the base rate versus one who preferred to keep it unchanged.
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Bank governor Andrew Bailey said: "Inflation is just below our 2% target and we have been able to cut interest rates again today.
"We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.
"But if the economy evolves as we expect, it's likely that interest rates will continue to fall gradually from here."
Mr Bailey's comments signal that it is very unlikely interest rates will rise again, but they will not be cut in the "aggressive" way he, or markets, had previously expected.
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Money markets are now betting interest rates will stay slightly higher for longer but reach 3.5% by the end of next year.
Interest rates have risen from historic lows of 0.1% in December 2021, and peaked at 5.25% in July 2023, as part of efforts to reduce inflation to the Bank's 2% target.
The Sun's James Flanders explains how to find the best deal on your mortgage
This led to a sharp increase in mortgage costs for millions of households, adding thousands of pounds to some bills, though savers saw returns on their savings go up.
The Bank of England made its first cut since 2020 from 5.25% to 5% in August.
The cut came after months of inflation, falling from a record high of 11.1% in October 2022.
Inflation measures how prices for everyday goods like food and clothing have changed compared to last year.
The BoE then held the key rate at 5% in its meeting in September.
Since then, official figures published in October showed that inflation fell to 1.7%, its lowest level since April 2021.
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The Bank reckons the Chancellor's move to hike employers' National Insurance contributions will lead to companies passing on the extra staffing costs by raising prices.
It also confirmed the budget watchdog's view that average wage growth will also fall as companies will not be able to afford to keep handing out pay rises.
Wage growth is expected to fall from 5 per cent to 3.25 per cent next year.
The Bank said that it will "monitor closely the impact of the increase in employer NICs on the labour market and wider economy".
Mr Bailey's comments signal that it is very unlikely interest rates will rise again, but they will not be cut in the "aggressive" way he, or markets, had previously expected.
Money markets are now betting interest rates will stay slightly higher for longer at 3.5% by the end of next year.
This is much higher than Wall Street bank Goldman Sachs' optimism that they could fall to 3.25% by the end of next year.
The latest MPC meeting comes after Rachel Reeves announced nearly £70billion in additional spending during her Autumn Statement.
The Office for Budget Responsibility (OBR) indicated that this sharp increase in spending will contribute to higher inflation in the coming months, although it will also help drive stronger economic growth.
It forecasts that inflation will average 2.5% this year and 2.6% next year before decreasing, assuming the Bank of England takes action to help bring it to the target rate.
Investors were unsettled by the watchdog's warning, leading economists to predict fewer rate cuts than previously anticipated for next year.
Last Thursday, bond traders drove up the interest rates, known as gilt yields, on 10-year government bonds to 4.56%, a move that temporarily caused mortgage rates to spike.
Markets are pricing fewer than four quarter-point cuts up to the end of 2025, down from a little under five prior to the Budget.
However, sterling lifted 0.4% to $1.293$ and was 0.2% higher at €1.202 euros this afternoon.
Despite this, today's rate cut brings good news for borrowers, including homeowners, who may benefit from a reduction in mortgage rates.
House prices hit an all-time high, new data out today reveals off the back of falling rates.
Chancellor Rachel Reeves said: "Today's interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous Government’s mini-budget.
"This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain while ensuring working people don’t face higher taxes in their payslips."
However, a cut to the base rate also means that savers might experience a decrease in the interest earned on their savings.
Here, we explain what today's rate drop means for your finances.
Homeowners could save up to £382 a year
When interest rates fall, mortgage rates typically follow suit.
That's because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.
However, the timing of when you will see the reduction depends on the type of home loan you have.
Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.
There are 643,000 customers on tracker mortgages and 624,000 on SVRs.
According to TotallyMoney, today's 0.25% rate cut will save homeowners with an average tracker mortgage £32 a month or £382 a year.
The average standard variable tariff rate is 7.95%, although these are among the priciest rates on the market.
However, those on fixed-rate mortgages won't see any changes until their deals end and they take out a new one.
Most mortgage holders, almost 7million, are on fixed deals.
Around 800,000 homeowners a year with a mortgage rate below 3% will have to refinance at a higher rate and still face a sharp jump in monthly costs.
When rates surged above 6%, borrowers on fixed-rate deals encountered substantial mortgage payment hikes upon remortgaging.
Higher fixed rates also made it more challenging for first-time buyers to enter the property market.
However, the average two-year fixed-rate deal is continuing to decline.
According to MoneyFactsCompare.co.uk, a typical two-year fixed rate in November 2022 was 6.47%, but it has now fallen to 5.39%.
Unfortunately, brokers do not think rates will ever return to record lows of 1 or 2%.
Rachel Springall, finance expert at MoneyFactsCompare.co.uk, said: "Borrowers who are due to come off a cheap fixed rate deal will be on tenterhooks for mortgage rates to drop before they refinance, but if they have some months ahead to wait, it may be wise to consider overpaying.
"Over the course of the past 12 months, mortgage rates have been coming down and the average two-year fixed rate has dropped by almost 1%.
"The incentive to switch away from a SVR remains prevalent, as on average the rate sits just shy of 8%.
"A typical mortgage being charged the current average SVR of 7.95% would be paying £403 more per month, compared to a typical two-year fixed rate."
David Hollingworth, associate director at L&C Mortgages added: "There are still some extremely sharp rates on offer with some rates still available below 4% but these are bound to be feeling the pressure.
"Applying for a deal will secure the rate and avoid any further increases.
"At the same time, they can still review the deal if rates do subsequently drop back."
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you're remortgaging and your loan-to-value ratio (LTV) has changed, you'll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home's value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you're nearing the end of a fixed deal soon it's worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal - but compare the costs first.
To find the best deal use a to see what's available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You'll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee - sometimes more than £1,000 - to the cost of the mortgage, but be aware that means you'll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you'll have to pass the lender's strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month's payslips, passports and bank statements.
Credit Card APRs could go down
When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can also fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
Lower interest rates can result in reduced annual percentage rates (APRs) on credit cards, making it more affordable to carry a balance.
However, it's important to remember that multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.
Your lender will let you know before making any changes.
Bad news for savings
Savers have been the primary beneficiaries of rising interest rates.
This is because banks often compete to offer market-leading rates, although they can be slower to pass these benefits on to customers.
However, falling interest rates spell bad news for those with savings.
Banks and building societies have already been preparing for future rate cuts and have started cutting rates in recent months.
According to Moneyfacts, the average easy-access savings account rate in November 2023 was 3.19%, compared to 3.03% today - down from 3.15% in August.
Not all savings account rates will fall immediately, though, so you could still lock in a good deal now.
Holly Tomlinson, financial planner at Quilter, said: "Currently, there are still some accounts paying as much as 7%.
"These won’t be around for long so having a careful look at your finances sooner rather than later is worthwhile."
Analysis by Shawbrook Bank suggests there are 1.4million savers with fixed deals ending before January.
According to Adam Thrower, the bank's head of savings, failing to switch accounts now "could be costly" for these savers.
However, ensure that you withdraw your cash only at the end of your fixed term. Otherwise, you will incur a penalty.
You can shop around for the best savings rates by using price comparison sites like Compare the Market, Go Compare, and MoneySuperMarket.
Pensions
The BoE's base rate also impacts pensioners looking to buy an annuity.
A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.
However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE's base rate can impact the rate you receive.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
However, Holly Tomlinson added: "Reducing the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.
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"Those nearing retirement should consult with a financial adviser to assess the timing of annuity purchases and explore other retirement income options."
We've previously explained how to ensure you get the best deal for your retirement.
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