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What does the Bank of England rate cut mean for you?

What does the Bank of England rate cut mean for you?

A few weeks ago, the Bank of England made the historic decision to cut its interest base rate to 0.25%. The decision is designed to lower the cost of repaying debt in the hope that people and businesses will spend more and (hopefully) give the UK economy a boost.

So, what does the change mean for your finances?

Mortgages

If you have a mortgage, the rate cut could be good news. For someone with an average sized mortgage (£116,000) the cut means you’ll pay £22 less a month.

However, the interest rate reduction won’t be passed on to everyone with a mortgage all at once. Only the 20% of mortgage holders with a Bank rate tracker mortgage will see the benefits of the change immediately.

If, however, you are one of the 3.2 million households with a standard variable rate mortgage then you will have to wait for your bank to decide whether it is going to pass the saving on to you. Some banks have already said they will make the change in September and the Bank of England governor has said banks have ‘no excuse’ not to. But, in the end, it is up to each bank.

Credit cards

History shows us that a fall in the base rate doesn’t necessarily mean cheaper credit cards. In fact, credit cards have become more expensive since the Bank introduced record low interest rates, and earlier this year average credit card interest rates hit an all-time high of 21.6% APR.

This is because interest rates for most credit cards are predominately based on how risky the lender thinks you are (calculated using your credit score) rather than the base rate. This means most credit cards will be unaffected by this change.

There are, however, a few cards out there that do use the base rate. Cards like the Halifax Clarity card use a ‘personal interest rate’ and the base rate to work out the total APR. If you have one of these you should see a small cut in your interest rate.

If you are struggling with your interest payments, there are cards offering some really long 0% periods – up to 41 months on some cards for people will the highest credit scores. In the ‘Offers’ section of your ClearScore account you can see if there’s a good 0% offer you can take advantage of.

Savings and pensions

On the other side of the coin, your savings will earn less sitting in the bank. While interest rates for savers have been low for a while, this cut means they are likely to stay lower for longer.

That said, shopping around a bit can still pay off as there are savings accounts out there which offer better returns than others. But you need to be quick. According to Susan Hannums, director at website Savings Champion, the best rates out there are being taken off the market fast.

Whether you’re pleased or put out by the Bank’s decision, it’s important to remember that rates are unlikely to stay this low forever. Don’t be lulled into a false sense of security only to be burnt when those repayments increase.

 

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