On 7 November 2024, the Bank of England’s (BoE) rate-setting committee voted to cut interest rates by 0.25% to 4.75% – bringing rates down to their lowest point in more than a year.

The cut is the second this year. The first, on 1 August, followed months of speculation about when the BoE might finally bring down the base rate after more than four years of steady increases. Many commentators had predicted that move to occur after inflation reached the Bank’s 2% target in May this year.

There is the possibility that rates may fall again by the end of 2024, with potential for further reductions throughout 2025. Here’s what the most recent cut – and further possible reductions in the base rate – could mean for you and your finances.

Rates may fall again by the end of 2024, with a potential for further reductions throughout 2025

A cut in interest rates might impact you in several ways

Between December 2021 and August 2023, the Monetary Policy Committee (MPC) voted to increase the base rate at 14 consecutive meetings. Now that rates are moving in the opposite direction, what could that mean for you?

A reduction in the base rate will likely result in banks and building societies lowering their interest rates on savings accounts and mortgages. Interest rates on other types of debt will probably also fall, while a change in the base rate typically also triggers movement in the stock and bond markets.

1, As saving rates fall, cash might become less attractive

Recently, saving returns have been higher than they’ve been for much of the last decade. However, as the Bank cuts the base rate, banks and building societies will likely reduce the rates on their savings accounts, making cash less attractive for building your wealth and beating inflation.

If the rates on your accounts do fall, you may be able to secure better returns on your cash by shopping around for a new savings account.

Lower interest rates also mean it’s important to save tax-efficiently. One way to do this is by using a Cash ISA, where all interest is paid free of Capital Gains Tax (CGT) and Income Tax.

Elsewhere, if you’re building wealth over the long run, you could benefit by moving some money from cash savings to investments.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. They can fluctuate in value, but over the long run they could give you the potential for an inflation-beating return.

To minimise your tax liability, you may consider investing in a Stocks and Shares ISA where all gains are free of CGT, Dividend Tax, and Income Tax.

It is important to remember, though, that the value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

2, Mortgages may become cheaper as interest rates fall

If you have a mortgage on your home or are borrowing on a second home or investment property, a cut in the base rate could result in lower monthly repayments.

  • If you have a fixed-rate mortgage, your monthly repayments won’t be affected immediately by a base rate cut. However, when you come to renew, you may be able to benefit from a better deal.
  • If you have a tracker mortgage, cuts in the base rate will usually be reflected in an immediate cut in your mortgage rate. For example, a 0.25% cut in the base rate should result in a 0.25% cut in your mortgage rate.
  • Variable mortgages are linked to your lender’s standard variable rate (SVR). If you have a variable-rate mortgage, your monthly repayments may fall when the base rate is cut, but there’s no guarantee – lenders can change their SVR as they see fit.
  • As a landlord, lower mortgage payments could allow you to take more income from your property portfolio. With higher earnings, it may be pertinent to consider how to take your income tax-efficiently and use the extra money to move towards your financial goals.

A side-effect of lower interest rates can be a growth in housing demand, as home loans become more affordable. So, as rates fall, you may see the value of your property rise.

3, A fall in interest rates could boost equities

A strong and diversified investment portfolio can be a powerful tool in helping you achieve your long-term goals. A base rate cut could provide a welcome lift to equities (shares issued by companies), some of which may be present in your investment portfolio.

This happens due to three primary mechanisms:

  1. Lower interest rates make borrowing cheaper for businesses, which can result in more investment and growth.
  2. Cheaper debt repayments mean consumers have more disposable income to spend on goods and services.
  3. Lower interest rates also mean people are more likely to borrow to buy big-ticket items, increasing consumption.

4, Bond prices may also rise

When the Bank cuts the base rate, coupon rates on bonds are also likely to fall.

Because bonds pay a fixed interest rate, when returns on new bonds fall, existing bonds become more attractive. So, if you hold any bonds, their value may increase.

5, Base rate cuts can benefit businesses

If you’re a business owner, the prospect of increased consumer spending may lead to greater revenues for your business.

Even if those trends don’t benefit your business directly, you may enjoy lower operating costs. The cost of new debt could also fall, reducing your expenditure and offering you the opportunity to invest.

Get in touch

If you’d like to learn more about how a cut in the base rate could affect your long-term financial plans, speak to your Amber River financial planner.

If you’re looking for help with building a personalised financial plan, call us on 0800 915 0000, or alternatively use our contact form here to set up an initial appointment.

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