The Bank of England surprised markets last week by holding firm at current record low of 0.5% base rate, despite the Governor, Marl Carney, signaling a cut. So where next for interest rates?
Although the interest rates stayed the same in July, its statement policy is for “loosening” monetary policy if the economy does not pick up. That means, the base rate could be cut to a new record low of 0.25% before the year is out, if the effects of Brexit are negative over the summer.
Why is Brexit negative for the economy?
The main reason is uncertainty. It means putting off investment, as businesses and households are not sure exactly how they will be affected, so stop spending. We have seen this first hand in Wales with the developments with the Tata plant in Port Talbot.
If we all stop our spending because we’re worried about the future, the country could go in recession. Reducing interest rates encourages us, as individuals, and to spend ourr money, because we get no return from leaving it in the bank. And to even borrow, because it will be come so cheap to do so.
What would a rate cut mean for mortgage payers?
If rates do fall before the end of the year, it will affect everyone differently, if at all. Remember, interest rates have been at these record lows since March 2009, so we may not necessarily notice a further cut.
If you have a fixed rate mortgage, then you won’t see the benefit, unless interest rates are still low when it is time for you to find a new deal. Any savings from changing your fixed-rate mortgage part way through will normally be offset by having to pay fees and interest payments.
However, if you have a tracker mortgage , where your payments change automatically when interest rates change, you will see the benefit. For example, if you have a 25-year, £250,000 repayment tracker mortgage at a 2% interest rate, Your monthly £1,100 repayment will go down by around £30 if the base rate is cut by 0.25%
What would a rate cut mean for savers?
Savers have had a raw deal for some time. The low base rate has led to few good deals on saving accounts. A further rate cut will probably be passed on to you if you’re a saver.
How will pensions be affected by interest rate cuts?
A rate cut will be especially bad news for anyone about to retire and in the process of buying an annuity for their retirement income. Annuity rates are dependent on the returns from government bonds, known as gilts. That’s how the life insurance companies that sell annuities hold their cash.
A rate cut could reduce the returns the life companies can achieve from that type of saving, the annuity income you would be able to buy will also be lower.
If you hold your pension pot in other ways, such as investments and drawdown capital, you switch money to different types of bonds, shares or overseas markets. We have seen share prices perform relatively well compared to bond products in a low interest environment. But you need to remember your capital is at risk and returns will depend on your investment horizon and attitude to risk.
With so much uncertainty around, now is the time to have your finances reviewed professionally. Especially if you want to change your mortgage or are within ten years of retiring. Call us today for advice on putting together a financial plan just for you.
Remember your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.
The value of investments can go down as well as up and you may not get back the amount invested.