So, the Bank Base Rate has fallen, but how does that affect you?
On Monday 4th August 2016, the Bank of England Monetary Policy Committee brought an end to months of conjecture with a reduction in the Bank Base Rate (BBR) to 0.25%. After remaining at 0.5% for over 7 years, the change certainly made the news, but what does it mean for you in practical terms?
If you’re on a “tracker” rate then your interest rate should drop. On a mortgage of £170,000 this equates to a saving of roughly £425 pa.
If you have a mortgage linked to your own bank’s “standard variable rate” (SVR), you may or may not benefit and there’s no guarantee as to when you will benefit even if you do. Whilst SVRs tend to be loosely linked to the Bank Base Rate, there are essentially set at the bank’s discretion, so your bank may decide to pass on the whole cut, part of the cut or none of it at all.
Finally, if it’s a fixed rate deal you have then unfortunately you won’t benefit. The change is irrelevant to you as your interest rate is fixed, for whatever term you tied into with your mortgage. That said, if your mortgage term is up soon you may find rates more attractive than they were. Even before the BBR cut, fixed rate mortgage rates have been dropping in recent months.
If you’ve got cash in the bank you will already be painfully aware of the derisory rates on offer for cash deposits. A fall in the base rate will only further fuel savings rate cuts. On a deposit of £10,000 this equates to roughly £25 pa before tax. But don’t forget, if you’ve got a fixed rate account then your interest rate will be guaranteed until the end of the term.
In terms of how soon you will be affected, banks are obliged to give existing customers 2 months’ notice of an interest rate change.
If you are close to taking your pension benefits and decide to secure an income via the purchase of an annuity, then there may be an impact. Annuity rates do tend to follow interest rates, so a fall in the base rate could affect the annuity rates on offer. Note that annuities are not the only way to access your pension benefits and you should seek professional advice when considering taking pension benefits.
Your Life in General
The recent base rate cut has already been followed by a fall in the value of the pound.
One implication of this is that you will get less for every £1 when exchanging currency for spending overseas. There’s also a chance that it could affect energy and fuel prices, as wholesalers generally buy in oil in dollars, and with a falling pound you need more pounds for every dollar.
Lucinda Moylan is financial planning operations manager at Chiks. Contact Lucinda on 01772 821021.