Interest rate cut: Winners & Losers

Posted on August 5th, 2016 | Categories - Mortgages, Retirement, Savings, SIPPs

win concept, think differentFollowing the decision by the Bank of England to cut base rate to 0.25%, whilst at the same time, offering additional financial support to banks and other lenders, we look at who are the main winners and losers after the change.

Winners

Some existing mortgage borrowers: If you have a tracker rate mortgage, which pegs the interest rate you pay to the Bank of England base rate, you will see a reduction in your mortgage payments.

Around 20% of all mortgages are arranged on a tracker basis. If yours is one of these, you can expect to receive a letter from your lender informing you of your new, lower payment, over the next few weeks.

The Council for Mortgage lenders has calculated the reduction borrowers with a tracker mortgage could see in their monthly repayments:

Mortgage sizeMonthly saving
£50,000£7
£100,000£13
£150,000£20
£200,000£26
£250,000£33

If your interest rate is calculated using the lender’s Standard Variable Rate (SVR), which is typically the rate you pay after an introductory offer, such as a fixed rate, has come to an end, you will have to play a waiting game to see if your lender passes on the rate cut.

Despite strong pressure from the Bank of England, some lenders won’t cut their rate, others of course will.

New mortgage borrowers: If you are due to take out a mortgage shortly after the rate cut, your payments may be slightly lower than you had anticipated, especially if you have opted for a tracker mortgage.

Losers

Savers: The big losers are of course savers, who will see interest rates cut even further.

Savers have become used to pitifully low interest rates, will a further 0.25% cut make a significant difference? Probably not, it equates to just £25 per year on every £10,000 saved. But, it is another blow to savers who have had to contend with low interest rates for nearly a decade and an indication that interest rates are not expected to rise any time soon.

Borrowers with a fixed rate mortgage: If you have a fixed rate mortgage, which means the interest rate stays the same for a period of time, usually two to five years, but sometimes longer, you will not benefit from the reduction in interest rates and your mortgage payments will stay the same.

Pensions: Those SIPP (Self Invested Personal Pensions) savers who use a deposit accounts in their pension, will of course be hit by lower interest rates.

Annuity buyers: Alongside the interest rate cut came an announcement that the Bank of England would further stimulate the economy by purchasing government and corporate bonds.

This will push down the yields on these assets, which are used to underpin Annuities. Consequently, we can expect to see a further fall in Annuity rates, which had already fallen to all-time lows as a result of gilt yield dropping after the referendum result.

If you already have an Annuity, your income will not be affected. But, if you are in the process of buying one, or considering whether an Annuity is the right option for you, take another look, you may get a lower income that you had previously expected.

We are here to help

All major decisions of this nature have an impact on our personal finances, there will of course be winners and losers; with some people better off than others as a result.

If you would like to learn more about how the interest rate cut affects your own personal finances, we are here to help.

Call Bev or Sarah today on 0115 933 8433 or email info@investmentsense.co.uk

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