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Interest rates affect every area of your finances, from your savings and borrowing to your investments and retirement income. Having an eye on how rates are likely to move in 2025 can help shape your financial planning for the year.
The key driver behind interest rates is the Bank of England Bank Rate, which is also known as the base rate or interest rate. Set by the Monetary Policy Committee, its aim is to support the UK’s economy by keeping inflation at 2%.
The Bank of England base rate was 0.5% or less from March 2009 to July 2018 during a long period of low interest rates. But the last few years have been a bit more bumpy. In a bid to control inflation, rates started rising sharply in 2022, hitting 5.25% in August 2023.
Some signs of easing came in 2024, with the Governor of the Bank of England Andrew Bailey able to pass on two cuts, taking the base rate down to 4.75% in November.
Falling interest rates are likely to continue in 2025, according to Ruth Gregory, Deputy Chief UK Economist at Capital Economics: “We think the Bank of England will cut Bank Rate gradually from 4.75% to 3.75% by the end of 2025, and to 3.50% in early 2026.”
Other experts are more cautious with their predictions. Laith Khalaf, head of investment analysis at AJ Bell, expects two to three cuts over 2025, pointing at all the economic uncertainty as the reason for his caution.
“The economic data points in different directions,” he says. “Inflation has come down but rises in national insurance and the minimum wage could be inflationary. No one knows what to expect from Donald Trump either: tariffs could push up prices here.”
While the unexpected could catch us out, everything is pointing to a downward trend in interest rates in 2025. Here’s how these lower rates could affect your finances.
Sadly, a lower Bank of England base rate means lower interest rates on your savings. “Cuts to the base rate tend to get passed on to variable savings accounts relatively quickly,” says Rachel Springall, a commentator at financial comparison website Moneyfactscompare.co.uk.
Fixed rate bonds, which pay a set amount of interest if you tie your money up for at least a year, behave slightly differently, as rates are determined by longer term expectations of the base rate.
Anna Bowes, savings specialist at personal finance website The Private Office, explains: “Three and five-year bond interest rates are lower than on one-year bonds, indicating that the market is expecting lower rates over the longer term. It may be worth looking for a fixed rate product now.”
Although interest rates may be set to fall, it’s not all doom and gloom. Springall says that competition is healthy, with new providers breathing fresh life into the savings market. But, with expectations of four cuts to the base rate, Bowes advises vigilance if you want to make the most out of your savings.
“Keep an eye on the best buys and be prepared to switch if you can do better,” she explains. “It’s also worth looking at cash ISAs: even where the rates are lower than on savings accounts, their tax-free status can boost the interest you receive.”
If you still have a mortgage, or you’re looking to help your children onto the property ladder, the good news is a lower base rate would mean mortgages will get cheaper. “Base rate is just one of many factors influencing mortgage rates, but we expect a more stable economy will lead to lower mortgage rates and improved affordability for anyone looking to buy or remortgage in 2025,” says Graham Sellar, Head of Intermediary Distribution at Santander.
Variable rate mortgages will shift in line with the base rate, and Gregory at Capital Economics expecting them to fall from 4.60% to 4.00% over the course of the year. But it’s set to be a bumpier ride for fixed rate deals.
These are based on longer-term expectations for interest rates, which can change on an almost daily basis as new economic data is released. This can make deciding when to fix tricky. “Don’t try to guess the market,” advises Sellar. “Focus on affordability instead, as this will be more important over the mortgage term.
” Whether or not you still have a mortgage, you might be wondering what interest rates would mean for the value of your home. Gregory believes there will be good news on this front. With interest rates falling, she believes house prices should have a decent 2025 and is forecasting a 3.5% rise in house prices.
Sellar’s expectations are more muted. Although he’s expecting a 2% increase, he says changes in stamp duty in April will affect homebuyer appetite. These changes, which remove the temporary stamp duty reduction, will mean stamp duty kicks in at £125,000 for residential properties (currently £250,000) and at £300,000 for first-time buyers (currently £425,000).
The prospect of cuts to the bank interest rate could be good news for investors. “Lower interest rates often make investing in stocks and bonds more attractive than keeping your money in cash,” says Jordan Clark, a financial planner at wealth management firm Quilter.
“It could be a good opportunity to review your portfolio or, if you’re not already investing, to dip a toe into the market.” Lower interest rates can also boost stock market performance. Borrowing is cheaper, making it easier for companies to put growth plans into action.
Similarly, a more benign economic environment can also boost consumer confidence and spending, fuelling further growth. However, before you start weighing up the investment potential of various companies or funds, Khalaf at AJ Bell advises caution.
“Lower interest rates should be positive for the stock market, but there are lots of other economic influences that affect performance.” Given all the uncertainty, it’s essential to stick to the principles of investing. Investments can go down as well as up, so spread your money across different assets and only invest for the long term.
If you’re looking to exchange your pension pot for an annuity, expect rates to fall in 2025. Annuity providers usually buy government bonds to fund their products. So if interest rates are reduced, the amount of income you’ll be offered on an annuity will too.
As taking out an annuity is a one-off decision that determines what you’ll get for life, Khalaf says it can be painful if you get the timing wrong. “We see more people using an annuity alongside drawdown, as this allows them to guarantee a set income while also benefitting from investment returns,” he explains.
“You could also consider staggering your annuity purchase, which reduces the risk of buying at the wrong time.”
Interest rates are expected to continue falling in 2025. This may impact the return you get on cash savings and could mean lower annuity rates, if you take one out this year. At the same time, mortgage payments may reduce and stock markets could benefit as investing money becomes more tempting in the face of lower cash interest rates.
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