Seven household bills set to change in wake of Bank of England base rate cut

Millions of mortgages bills will FALL as the Bank of England interest rate decision is confirmed. During today's meeting of the Monetary Policy Committee (MPC), the BoE's rate-setters reduced the base rate from 5% to 4.75%.

Bank governor Andrew Bailey said: "Inflation is just below our 2% target and we have been able to cut interest rates again today. We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.

"But if the economy evolves as we expect, it's likely that interest rates will continue to fall gradually from here." Looking further ahead into 2025, Chris Arcari, head of capital markets at Hymans Robertson, said he expects a slower pace of rate cuts throughout the year.

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He said: “The front-loaded nature of the spending and the Office for Budget Responsibility’s (OBR) forecast impact on near-term growth and inflation has seen the market shift to expect a slower pace of rate cuts from the Bank of England.”

The Bank generally keeps interest rates high to tackle high inflation, and cuts them as inflation gets towards its 2 per cent target. Below are seven ways the base rate decision will impact your finances as we head towards Christmas:

Mortgages

Moneyfacts said on Thursday that the average new two-year fixed-rate mortgage deal had nudged up slightly to 5.42%, while the average five-year deal had ticked up to 5.13%. Nicholas Mendes, the mortgage technical manager at the broker John Charcol, said: “I expect mortgage rates to resume their downward trend before the end of the year, likely returning to the best rates we’ve seen recently, with further improvements anticipated into next year. However, borrowers should keep in mind that current fixed mortgage rates already reflect some of the anticipated bank rate cuts over the coming year. As a result, I foresee the lowest fixed rates stabilising around the low 3% range next year.”

By contrast, Peter Stimson, head of product at MPowered Mortgages, said anyone hoping the Bank’s decision would instantly open the floodgates to cheaper mortgages “is likely to be disappointed,” adding: “In fact, the mortgage rates offered to new borrowers and remortgagers could even increase in coming weeks.”

Savings rates

The returns on savings are generally not entirely tied to the Bank of England base rate, but Thursday’s reduction is likely to be passed on to many savers who have easy-access accounts and others who do not have guaranteed interest rates.

On Thursday it was possible to pick up a fixed-rate savings account paying as much as 5% from the likes of the app-based Atom Bank. Discussing mortgages, Amy Knight, personal finance expert at NerdWallet UK, explains the impact for homeowners and prospective buyers.

“Though the base rate has taken a downward step, progress from here could stall and borrowers should brace themselves for a longer than anticipated wait for cheaper mortgages. The government’s spending plans are expected to fuel inflation, making a slower approach to rate cutting more likely," she said.

"Mortgage rates have been hovering just above 4.5% in anticipation of more cuts from the Bank of England. But with confidence in a second rate cut this side of Christmas draining away, prospective buyers should be prepared for the mortgage market to have a post-Budget wobble.

"If you’re on a variable-rate mortgage, try not to panic – ultimately, rates are still expected to come down, but we could see a slight increase in borrowing costs in the short term as the markets adjust. Taking a proactive approach to tightening up your budget can make higher repayments easier to manage.

"For those hoping to buy a home in 2025, focus on the factors you can control while waiting for rates to fall. Avoid overstretching yourself financially as Christmas approaches: keeping your credit score looking healthy should be a priority.”

Credit cards

Lower interest rates on credit cards can make the cost of repayments cheaper as the APR drops. Credit card rates went up in recent years as the base rate increased. However, they are not explicitly linked to the base rate, so providers will not be obliged to pass on cuts.

Loans

Loans are fixed, so if you are already borrowing money in this way, you will continue to pay interest at the rate at which you originally signed up. According to Rohit Kohli, Director at The Mortgage Stop : "Borrowers will expect that when savings are made available via a Bank of England rate cut, they’re passed on promptly, not at the convenience of the lender. When rates go up, lenders seem to pass on the increase to borrowers almost instantly. But when rates drop, as we've seen with the recent Bank of England cut, passing on the savings takes much longer."

Pensions

One expert explains that annuity rates are closely tied to government bond yields, which can be influenced by changes in interest rates. She said: "A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.

"Those nearing retirement should consult with a financial adviser to assess the timing of annuity purchases and explore other retirement income options."

Household debt

Alice Haine added: "Add in Reeves’s raft of tax rises in the Budget and the effect of fiscal drag on people’s take-home pay, a result of frozen personal tax thresholds with more people paying higher rates of tax as their income increases, and, for many, balancing the books may still be a struggle. Consumers should not consider a second interest rate cut as the signal to rush out and spend big in the run-up to Christmas.

"Running down emergency funds or borrowing to fund a major lifestyle cost should always be considered carefully to ensure repayments are fully affordable, and with the cost of servicing debt, such as loans, overdrafts and credit cards, still high, plans for major purchases placed on pause amid affordability concerns should ideally remain so."

Overdraft fees

Interest on all overdrafts is charged at a single annual interest rate (APR), making it easier to compare charges between accounts. Interest rates from banks and building societies on their overdrafts range from 19% to 40% or more.