Yesterday’s big news was the announcement by the Bank of England that interest rates would be cut from 0.5 percent to 0.25 percent. But amongst all the financial jargon – what does that mean for you?
Essentially, a rate cut can be good or bad – or both. Lower interest rates mean less to pay back on a loan if you’re a borrower, but less interest accumulated on money in the bank if your’re a saver.
What is the impact on borrowers?
Those affected most will be mortgage holders. According to data from the Office for National Statistics, the Bank of England’s cut will mean an average £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000, with the average monthly bill being around £779.
However, the rate cut will only affect borrowers who have a bank tracker rate mortgage – a mortgage whereby the interest rate varies in direct relation to that of the Bank of England’s announcement. Unfortunately only one in five mortgage holders have a loan of this type; nearly half of lenders have a fixed-rate mortgage, which will remain unaffected by the rate change.
And for savers?
In simple terms, a bank rate cut is bad news for savers; in fact, the rate cut is designed to create a bad saving environment and encourage the population to spend instead.
Whilst interest rates on savings accounts have been poor for years, they are likely to get steadily worse from now. At the moment, the average interest rate on an easy access savings account is 0.65 percent; this is now likely to drop to 0.4 percent. Many banks have already cut their rates in anticipation, including West Bromwich Building Society and Nationwide.
What about the possibility of negative interest rates?
A negative rate is designed to encourage savers to take their money out of savings accounts and spend it, thus stimulating the economy. Bank of England governor Mark Carney made it clear in his announcement yesterday that negative rates were not something being considered at the moment, but warned that rates may drop to 0 percent in the near future. From there, surely, negative rates are just one small step?
Several European countries already have negative rates, including Switzerland, Denmark and Sweden. If this happens, the chances are banks will adopt negative rates too, meaning that, essentially, the British population will be paying banks to hold their money. Just last week, the Royal Bank of Scotland wrote to its business customers to warn them that it might charge negative interest rates if the Bank Rate should fall below zero, and it is likely that many more would follow suit.
Miranda Wadham on 05/08/2016
