Mortgages and borrowing
Today’s rate cut is likely to bring a sense of cautious relief to borrowers, particularly those approaching the end of fixed-rate mortgage deals taken out during the peak of the rate-hiking cycle. With the Bank Rate now at 4.00%, lenders may start to reflect the lower cost of funding in new deals, but changes are unlikely to be immediate or uniform across the market.
For those on variable or tracker mortgages, some changes may come through more quickly. That said, average mortgage rates remain significantly higher than the ultra-low levels borrowers became accustomed to during the 2010s. Even with this latest reduction, the cost of borrowing is still meaningfully above pre-2022 norms, and the affordability challenge remains acute for first-time buyers and those looking to move up the housing ladder.
Markets currently expect the Bank to cut rates once more this year, potentially taking the base rate to 3.75% by year-end. But progress is likely to be slow and data-dependent, meaning those making major borrowing decisions should continue to plan on the basis of a more elevated interest rate environment.
Savings and ISAs
Savers may find today’s decision less welcome. Cash savings rates have been among the few beneficiaries of the Bank’s earlier rate hikes, but they are now under pressure as expectations shift. Banks and building societies are typically quick to respond to rate cuts, particularly on easy-access accounts, meaning the top rates may start to slip.
Fixed-rate savings products may hold up for a little longer as institutions manage existing funding strategies, but the overall trend is clear. Those looking to make the most of their savings may want to consider locking in rates now, while they remain relatively high.
The broader challenge is that many savings rates are once again falling below inflation, and the erosion of real returns is becoming an issue for households trying to preserve the value of their money. Diversification, including a considered approach to investing, may be needed to maintain purchasing power over time. This also plays into the hands of the Labour government, which has been vocal about helping more people unlock the benefits of long-term investing. As the appeal of cash weakens, nudging more savers toward investment solutions becomes a more politically and economically viable strategy.
Annuities and retirement income
For retirees considering their income options, today’s rate cut could mark a turning point. Annuity rates, which have been particularly attractive in recent months thanks to high gilt yields, may start to decline.
Anyone weighing up whether to convert part of their pension pot into a guaranteed income should take advice and consider acting sooner rather than later. While rates may not drop off a cliff, the window to secure particularly favourable terms could begin to narrow if this cycle of easing continues.
For those in drawdown, the relative appeal of annuities versus staying invested may also shift. With lower interest rates potentially providing a tailwind to equity markets, there may be renewed value in keeping options open but only with a clear plan that balances income needs and risk tolerance.
Credit and debt
Households carrying short-term debt such as credit cards or overdrafts will hope today’s cut brings some relief, but the effect may be limited in practice. Many forms of consumer credit remain stubbornly expensive, and lenders have been slow to pass on reductions in base rate to borrowers.
Nonetheless, this shift in monetary policy should begin to improve affordability for those managing repayments or looking to consolidate debt. If employment conditions continue to weaken, any reduction in interest costs will be welcome but the priority should still be to reduce expensive borrowing wherever possible.
Looking ahead
Today’s decision makes it clear that the Bank of England now sees the greater risk in doing too little to support the economy, rather than too much. Inflation has fallen substantially from its double-digit peak but it still remains above the 2% target. At the same time, the labour market is softening, and economic growth remains subdued.
With another rate cut possible before the end of the year, and markets anticipating a base rate closer to 3.5% by mid-2026, households and investors should be thinking not just about where rates are today, but where they are going next.
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