The Bank of England cut interest rates to 5% in its August meeting,
following seven consecutive holds at 5.25%. This change in interest rates affects mortgage, credit card, and savings rates for millions across the UK. Despite this being the first rate drop since March 2020, borrowing costs remain high.
Understanding Interest Rates
Interest rates indicate the cost of borrowing money or the reward for saving it. The Bank of England's base rate, which it charges other lenders, influences the rates these lenders charge customers for loans, including mortgages, and the interest paid on savings. The Bank adjusts rates to control UK inflation, which measures the price increase of goods and services over time. When inflation is high, the Bank may raise rates to hit the 2% target, encouraging reduced spending to lower inflation. Conversely, the Bank may hold or cut rates once inflation begins to fall.
How Do Interest Rates Affect You?
Mortgage Rates
According to the government's English Housing Survey, about a third of households have a mortgage. Over half a million homeowners have mortgages that track the Bank of England's rate. The recent 0.25 percentage point cut will reduce their monthly repayments by about £28 on average. Those with standard variable rate mortgages will see a reduction of around £15 in their payments.
However, over 80% of mortgage holders have fixed-rate deals, meaning their current payments won't change immediately, but future deals will be influenced by current rates. Mortgage rates are significantly higher than in the past decade, with the average two-year fixed rate now at 5.77%, as reported by Moneyfacts. Consequently, homebuyers and those remortgaging face higher costs compared to a few years ago. Additionally, 1.6 million mortgage deals are set to expire in 2024, according to UK Finance.
Credit Cards and Loans
The Bank of England's interest rates significantly impact the cost of credit cards, bank loans, and car loans. When the Bank of England raises its rates, lenders often increase their rates as well, leading to higher costs for borrowers. Conversely, if the Bank lowers its rates, borrowing costs on credit cards and loans may decrease.
Savings
Interest rates set by the Bank of England also affect the returns savers can earn on their deposits. Higher interest rates generally lead to better returns for savers. Banks and building societies have faced pressure to pass these higher rates on to their customers, ensuring savers benefit from the increased rates.