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| Version 3 | Version 4 |
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| How the interest rate cut affects you | How the interest rate cut affects you |
| (about 1 hour later) | |
| After almost endless speculation, the Bank of England has announced a cut in interest rates to 0.25%. So, how will the move affect you? | After almost endless speculation, the Bank of England has announced a cut in interest rates to 0.25%. So, how will the move affect you? |
| Generally, a Bank rate cut is regarded as good for borrowers - particularly those with a mortgage - and bad for savers. | Generally, a Bank rate cut is regarded as good for borrowers - particularly those with a mortgage - and bad for savers. |
| Millions of people in the UK fall into both categories, so what aspects of the family budget do they need to review? | Millions of people in the UK fall into both categories, so what aspects of the family budget do they need to review? |
| Mortgages | Mortgages |
| A mortgage is by far the biggest debt taken on by the majority of households in the UK. | A mortgage is by far the biggest debt taken on by the majority of households in the UK. |
| An estimated 11.1 million households have one. The typical amount still left to pay on each home loan in the UK is £116,000, according to the Council for Mortgage Lenders. | An estimated 11.1 million households have one. The typical amount still left to pay on each home loan in the UK is £116,000, according to the Council for Mortgage Lenders. |
| Using Office for National Statistics (ONS) house price data, a cut to 0.25% means a £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000 having taken a 20% deposit into account. | Using Office for National Statistics (ONS) house price data, a cut to 0.25% means a £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000 having taken a 20% deposit into account. |
| So that is a £22 cut on a monthly mortgage bill of about £779. | So that is a £22 cut on a monthly mortgage bill of about £779. |
| Key to when this saving is made - if at all - depends on the kind of mortgage that people have. | Key to when this saving is made - if at all - depends on the kind of mortgage that people have. |
| Those who will see an immediate benefit are those on Bank rate tracker mortgages - in other words, home loans with an interest rate that goes up or down in direct relation to the Bank of England's decision. | Those who will see an immediate benefit are those on Bank rate tracker mortgages - in other words, home loans with an interest rate that goes up or down in direct relation to the Bank of England's decision. |
| One in five mortgage holders have this type of loan. | One in five mortgage holders have this type of loan. |
| Approaching a third of mortgage holders (29%) have home loans that are on the standard variable rate - the default option after a fixed term has run its course. | Approaching a third of mortgage holders (29%) have home loans that are on the standard variable rate - the default option after a fixed term has run its course. |
| They will be in the hands of the lender. Some mortgage providers may pass on the cut in full, some may decide on a partial cut, others may make no change at all given the historical low levels on interest rates. | They will be in the hands of the lender. Some mortgage providers may pass on the cut in full, some may decide on a partial cut, others may make no change at all given the historical low levels on interest rates. |
| A handful of banks announced they would pass the cut on in full in the hours after the rate change, with others expected to follow suit. A separate scheme announced by the Bank - called the Term Funding Scheme - is designed to ensure that banks pass on the rate cut. | |
| In fact, Bank governor Mark Carney said banks had "no excuse" not to pass on the cut to households. | In fact, Bank governor Mark Carney said banks had "no excuse" not to pass on the cut to households. |
| Finally, there are those on fixed rate mortgages - equating to nearly half (46%) of all mortgage holders. | Finally, there are those on fixed rate mortgages - equating to nearly half (46%) of all mortgage holders. |
| They will see no change. However, if their mortgage term is up soon, they may find they pay less if and when they sign up to a new one. Fixed mortgage rates on new deals have been falling - even when there was no change to the Bank rate. | They will see no change. However, if their mortgage term is up soon, they may find they pay less if and when they sign up to a new one. Fixed mortgage rates on new deals have been falling - even when there was no change to the Bank rate. |
| An increasing number of people have signed up to longer term fixed rate deals - locking them in for up to 10 years. For them, this change is fairly irrelevant. | An increasing number of people have signed up to longer term fixed rate deals - locking them in for up to 10 years. For them, this change is fairly irrelevant. |
| Savings | Savings |
| The theory of a Bank rate cut is that consumers see a cut in their mortgage bill, and a worsening return on their savings, so they go out and spend. Hence, there is a boost to the economy. The same is basically true for businesses who will be more minded to invest. | The theory of a Bank rate cut is that consumers see a cut in their mortgage bill, and a worsening return on their savings, so they go out and spend. Hence, there is a boost to the economy. The same is basically true for businesses who will be more minded to invest. |
| That is the relatively simplistic explanation but it does make it clear that a Bank rate cut is bad for savers. | That is the relatively simplistic explanation but it does make it clear that a Bank rate cut is bad for savers. |
| At the moment, the average interest rate on an easy access savings account is 0.65%. If that average mirrors a change in the Bank rate, this will drop to 0.4%. | At the moment, the average interest rate on an easy access savings account is 0.65%. If that average mirrors a change in the Bank rate, this will drop to 0.4%. |
| So, for anyone with £10,000 saved in such an account, they will receive £40 a year in gross interest, which is £25 less than before the cut. | So, for anyone with £10,000 saved in such an account, they will receive £40 a year in gross interest, which is £25 less than before the cut. |
| Rates have been fairly pitiful for years, and even those locking in their savings for five years are only getting an average of 1.97% in interest. | Rates have been fairly pitiful for years, and even those locking in their savings for five years are only getting an average of 1.97% in interest. |
| One thing to consider is that a cut is not automatic. | One thing to consider is that a cut is not automatic. |
| In fact, providers have not waited for a Bank rate change to cut the returns they offer. | In fact, providers have not waited for a Bank rate change to cut the returns they offer. |
| "It look like rates have taken a hammering in the last week, and the base rate had not even changed," said Susan Hannums, of SavingsChampion.co.uk. | "It look like rates have taken a hammering in the last week, and the base rate had not even changed," said Susan Hannums, of SavingsChampion.co.uk. |
| "Many savings accounts could not even suffer a quarter point cut. With almost a third of easy access accounts currently paying 0.25% or less, savers need to act now to better their returns." | "Many savings accounts could not even suffer a quarter point cut. With almost a third of easy access accounts currently paying 0.25% or less, savers need to act now to better their returns." |
| For every savings rate that has been increased in 2016, around nine have been cut, according to data from financial information service Moneyfacts. | For every savings rate that has been increased in 2016, around nine have been cut, according to data from financial information service Moneyfacts. |
| About three-quarters of bank current accounts do not pay interest at all. | About three-quarters of bank current accounts do not pay interest at all. |
| Pensions | Pensions |
| The Bank of England also added further stimulus measures to the rate cut - namely, the purchase of government and corporate bonds. | The Bank of England also added further stimulus measures to the rate cut - namely, the purchase of government and corporate bonds. |
| This will have no effect on the state pension. | This will have no effect on the state pension. |
| It will, however, add extra pressure on the deficits facing defined benefit pension schemes, such as final-salary pensions, putting increased pressure on businesses to plug that gap or reduce the availability of such pensions. | It will, however, add extra pressure on the deficits facing defined benefit pension schemes, such as final-salary pensions, putting increased pressure on businesses to plug that gap or reduce the availability of such pensions. |
| Those who are buying an annuity, a retirement income for life, from their defined contribution pension pot may also now get a worse deal. | Those who are buying an annuity, a retirement income for life, from their defined contribution pension pot may also now get a worse deal. |
| "The decision to reduce interest rates could add insult to injury for pension savers already reeling from the Brexit vote," said AJ Bell senior analyst Tom Selby. | "The decision to reduce interest rates could add insult to injury for pension savers already reeling from the Brexit vote," said AJ Bell senior analyst Tom Selby. |
| "Insurers use government gilt yields to price annuities, so a cut in the base rate puts further downward pressure on UK gilt yields and, in turn, annuity prices." | "Insurers use government gilt yields to price annuities, so a cut in the base rate puts further downward pressure on UK gilt yields and, in turn, annuity prices." |
| The flipside is that share prices have been driven up by the Bank's decision. That means those still paying into a private pension - and, indeed, investors in general - will see a boost in the value of these investments. | The flipside is that share prices have been driven up by the Bank's decision. That means those still paying into a private pension - and, indeed, investors in general - will see a boost in the value of these investments. |
| Pensions and other investments are, of course, a long-term project so the long-term health of the economy is arguably the most important element to consider. | Pensions and other investments are, of course, a long-term project so the long-term health of the economy is arguably the most important element to consider. |
| Holiday money | Holiday money |
| The decision by the Bank of England has led to an immediate fall in the value of the pound. | The decision by the Bank of England has led to an immediate fall in the value of the pound. |
| Although this remains higher than its lowest point of recent weeks, it may mean UK holidaymakers get a bit less for their money when buying foreign currency than they did earlier this week. | Although this remains higher than its lowest point of recent weeks, it may mean UK holidaymakers get a bit less for their money when buying foreign currency than they did earlier this week. |