Here’s our quick two minute guide on how you might be affected by an interest rate cut.
If you’re a saver
As of July 2016 the rate that savers get through an ISA or regular savings account is quite low. Any cut, providing your account is linked to the base rate, would see a marginal slide in the interest you could earn (assuming it was a cut of 0.25% and you don’t have millions in your account). It’s worth remembering that since April 2016 you can earn up to £1000 in interest on your savings and not pay tax. More detail can be found on the gov.uk site.
How does an interest rate cut affect rent?
As a private renter you may think that an interest rate cut wouldn’t affect you. But your landlord, or whoever owns the house, could have cheaper monthly payments as a result. If this is the case then those cuts may or may not be passed on to you. It could be worth checking your rental agreement about what happens in these circumstances. We would assume that most landlords wouldn’t pass the savings on in the event of a cut – though it may depend on how the mortgage on the property is financed. But it’s always worth asking and negotiating when it comes around to renewing your rental agreement. The worst they can do is say no.
How does an interest rate cut affect homeowners?
Depending on your deal, and what you have in place, this should cut your monthly payments. It’s worth remembering that not all mortgage providers will pass on a cut to your monthly payments.
On a 25 year £100,000 mortgage you’ll pay around £13 less per month. This is based on the rate going from 3.75 to 3.5%.
If you want a personal loan or credit card
Most rates for a personal loan are usually fixed or guaranteed before you take it out. Though lenders can change the rate providing you get written notice in advance.
If we take a macroeconomic view (meaning that we consider other factors that could also affect your finances) a cut to interest rates usually means that the economy could be struggling – and the Bank of England wants to stimulate growth. This could be down to high unemployment, price increases on everyday items or a weak pound. That normally means consumers can’t or don’t want to spend. But in order to encourage borrowing, and make money from loan repayments, the banks then make the loan market more competitive by cutting their personal loan rates.
The same could be said for credit cards offers and promotional periods – though always check the overall APR and your ability to repay what you owe. Some providers will charge for late payments and even change the APR if you fail to make regular payments – which will increase what you need to pay back.
Can you remember what was happening the last time interest rates were cut? Take a trip down memory lane.
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