How will the interest drop affect you?

Chris Torney / 04 August 2016

The recent interest drop will have a number of knock-on effects on the likes of savings accounts, mortgages, pensions and holiday currency…



An all-time low of 0.25%

The Bank of England has announced a cut in the base rate, taking it to an all-time low of 0.25%.

The reduction, the first change in more than seven years, comes in response to the decline in economic confidence – predominantly among businesses – that has followed the EU referendum in June.

The interest rate cut, allied with a new programme of quantitative easing in which more funds are made available to banks, is designed primarily to increase lending to businesses.

But there will be a number of knock-on effects on the likes of savings accounts, mortgages, pensions and holiday currency:

Savings

The rate cut means that the low returns savers have endured since the financial crisis in 2008 will continue for the foreseeable future.

However, with rates already close to zero on many deposit accounts, there is only so much further they can fall.

How to switch a bank account

What Sandra Morrell, our Family-First Plate Spinner has done since the interest rate drop

"I’ve felt for a while now that there’s no point in keeping my money in traditional savings accounts, as there’s simply no return at the moment. 

"Both my husband and I worked at a bank, so we’ve always tried to stay smart with our money – filling up our stocks and shares ISA allowance and buying shares."

Read more on Sandra's actions since the interest rate drop

Investments and pension funds

Lower savings rates should make investing in the stock market more attractive in relative terms.

But with more money being pumped into the economy by the Bank of England through a new quantitative easing (QE) programme, share prices could rise over the coming months.

This is what has happened during past QE programmes, and is partly because QE pushes down bond returns so investors are more likely to put money in shares.

However, there is no guarantee share prices will rise – and the impact of the economic downturn expected by the Bank of England could depress prices.

Gareth Shaw explains how you can beat the savings slaughter

What Bryan Manley-Green, our Carefree Down-to-Earther, has done since the interest rate drop

"When looking for decent rates, I find that it’s difficult to find a good return, especially if you want instant access to funds. 

Rising share prices mean dividend yield is decreasing, so the stock market is not necessarily a hiding place for us if we want some income."

Read more on Bryan's actions since the interest rate drop

Annuities

If you are considering turning your pension investments into retirement income in the near future, the news for annuities is not good.

The QE programme mentioned above involves the Bank of England buying billions of pounds’ worth of bonds in order to pump money into the economy.

This leads to lower rates on bonds, upon which annuity rates are based. Annuity rates have been low for several years, and it appears matters will soon get even worse.

What is an annuity?

Currency

Low interest rates and falling economic confidence in the UK both put downward pressure on the value of sterling: these factors mean that foreign companies are less likely to invest here, so demand for the pound falls.

This is bad news for anyone heading abroad in the near future.

In the aftermath of the EU referendum, sterling lost around 15% of its value versus the dollar and a similar amount against the euro.

The Bank’s announcement of a rate cut has resulted in further falls.

How to get a good deal on holiday money

What John King, our Financial Adventurer, has done since the interest rate drop

"Although the bulk of my savings are tied up in the stock market, I’ve been hit by the change in the base rate – but other factors, such as the fall in the pound and the subsequent rise in the stock market, have at least offset some of the pain..."

Read more on John's actions since the interest rate drop

Mortgages and loans

Borrowers who are on their mortgage provider’s standard variable rate (SVR) or another type of tracker loan could see their interest rate fall in line with the 0.25% base-rate cut.

Meanwhile, the cost of new mortgages could fall to some degree.

Rates on new personal loans could also fall slightly, but the link between the base rate and credit card interest rates is tenuous so no major change here should be expected.

What Jenny Jones, our Cautious Play-It-Safer, has done since the interest rate drop

"I know interest rates aren’t going up any time soon, and I think there will be some hard times ahead. I’ll have to adapt as and when that comes. 

"Until then, I’m going to be searching for a better deal on my savings and hope that I can keep my dog Robbie out of the vet – he’s costing me a fortune at the moment!"

Read more on Jenny's actions since the interest rate drop

One loan rate, endless possibilities. Are you 50–75 years old, a homeowner in England, Scotland or Wales with an income of £12,000 or more? Find out more about Saga Personal Loans, provided by Shawbrook Bank Limited.


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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.