How does yesterday’s drop in interest rates affect you?

Friday, 5 August 2016
Yesterday the Bank of England announced that they were lowering interest rates to a historical low of 0.25%. How will that affect you? Experian has taken a closer look.

Mortgages:

Interest rates on mortgages typically follow the Bank of England base rate. The higher the interest rates, the more you pay back. Yesterday, they were lowered to 0.25%, which is positive for home buyers or re-mortgagers: it means repayments on mortgages should be lower, provided you’re not already in a fixed term mortgage and your bank passes on the rate drop.

Some banks may choose to lower their fixed rates of interest for future customers, too. A recent Experian Twitter poll highlighted that 61% of respondents see mortgages or homeownership as a key priority, so hopefully, the rate cut may be able to help them achieve that goal.

So, does this mean it’s a good time to buy? 

 Yes and no. Reducing interest rates could weaken the pound, which may cause a drop in house prices. And don’t forget, what goes down must go up! Just because interest rates are low at the moment, it doesn’t mean they won’t increase again, so make sure you can afford any increase in repayments if rates were to rise.

It’s also worth considering what kind of mortgage is most suitable for you at the moment – do you want a variable, fixed term or tracker mortgage?

The below table is based on someone purchasing a £250,000 property with a £30,000 deposit and a £220,000 five-year fixed term mortgage repaid over 30 years. It shows you how fluctuating interest rates can affect your repayments.


Figure 1: What interest rates could mean for your disposable income 
Interest Rate 9.50% 2.00% 1.15%
Repayment cost per month £1849.88 £813.16 £772.87
Total cost of borrowing (over 30 year period - inc. fee) £111,992.76 £49,789.77 £44,372.03
(Source: Figures from the mortgage calculator on This Is Money)

Savings or Credit: 

This is where the real negative effects could be felt: as interest rates are low, it’s harder for savers to make money from interest, so the rate cut certainly won’t be welcome for those trying to build a savings pot. However, it’s always worth having some savings put aside for a rainy day.

On the flip side, low interest rates make it a good time for those borrowing through credit (in particular on a mortgage), because the interest will typically be lower. A combination of low interest rates and a high credit score could mean there are some good offers on credit available to you – just remember to check for hidden costs and Annual Percentage Rates (APR).

Currency: 

 As mentioned earlier, a reduction in interest rates could trigger a lower pound, therefore us Brits could be worse off on holiday. It’s difficult to say when will be a good time to get your currency as this is dependent on so many variable factors, but it’s worth keeping an eye on how the rates are moving if you’re planning on going abroad this summer.

This article was provided by Experian. Promotional links are provided for marketing purposes.

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