MILLIONS of mortgage bills are set to fall after the Bank of England confirmed a cut to interest rates.

During today’s meeting of the Monetary Policy Committee (MPC), the BoE’s rate-setters reduced the base rate from 5% to 4.75%.

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The base rate is used by lenders to determine the interest rates offered to customers on savings and borrowing costs including mortgages.

This reduction means that millions of mortgage holders are set to see their bills fall.

It’s only the second cut since 2020 but Brits may now have to wait longer for another rate cut next year because the Budget has raised the risk of inflation remaining higher for the next three years.

Eight of the MPC members voted to cut the base rate versus one who preferred to keep it unchanged.

Bank governor Andrew Bailey said: “Inflation is just below our 2% target and we have been able to cut interest rates again today. 

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.

“But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”

Mr Bailey’s comments signal that it is very unlikely interest rates will rise again, but they will not be cut in the “aggressive” way he, or markets, had previously expected.

Money markets are now betting interest rates will stay slightly higher for longer but reach 3.5% by the end of next year. 

Interest rates have risen from historic lows of 0.1% in December 2021, and peaked at 5.25% in July 2023, as part of efforts to reduce inflation to the Bank’s 2% target.

This led to a sharp increase in mortgage costs for millions of households, adding thousands of pounds to some bills, though savers saw returns on their savings go up.

The Bank of England made its first cut since 2020 from 5.25% to 5% in August.

The cut came after months of inflation, falling from a record high of 11.1% in October 2022.

Inflation measures how prices for everyday goods like food and clothing have changed compared to last year.

The BoE then held the key rate at 5% in its meeting in September.

Since then, official figures published in October showed that inflation fell to 1.7%, its lowest level since April 2021.

The latest MPC meeting comes after Rachel Reeves announced nearly £70billion in additional spending during her Autumn Statement.

The Office for Budget Responsibility (OBR) indicated that this sharp increase in spending will contribute to higher inflation in the coming months, although it will also help drive stronger economic growth.

It forecasts that inflation will average 2.5% this year and 2.6% next year before decreasing, assuming the Bank of England takes action to help bring it to the target rate.

Investors were unsettled by the watchdog’s warning, leading economists to predict fewer rate cuts than previously anticipated for next year.

Last Thursday, bond traders drove up the interest rates, known as gilt yields, on 10-year government bonds to 4.56%, a move that temporarily caused mortgage rates to spike.

Markets are pricing fewer than four quarter-point cuts up to the end of 2025, down from a little under five prior to the Budget.

Despite this, today’s rate cut brings good news for borrowers, including homeowners, who may benefit from a reduction in mortgage rates.

House prices hit an all-time high, new data out today reveals off the back of falling rates.

Chancellor Rachel Reeves said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous Government’s mMini-budget.

“This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain while ensuring working people don’t face higher taxes in their payslips.”

However, a cut to the base rate also means that savers might experience a decrease in the interest earned on their savings.

Here, we explain what today’s rate drop means for your finances.

MORTGAGES

When interest rates fall, mortgage rates typically follow suit.

That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.

However, the timing of when you will see the reduction depends on the type of home loan you have.

Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.

There are 643,000 customers on tracker mortgages and 624,000 on SVRs.

According to TotallyMoney, today’s 0.25% rate cut will save homeowners with an average tracker mortgage £32 a month or £382 a year.

The average standard variable tariff rate is 7.95%, although these are among the priciest rates on the market.

However, those on fixed-rate mortgages won’t see any changes until their deals end and they take out a new one.

Most mortgage holders, almost 7million, are on fixed deals.

Around 800,000 homeowners a year with a mortgage rate below 3% will have to refinance at a higher rate and still face a sharp jump in monthly costs. 

When rates surged above 6%, borrowers on fixed-rate deals encountered substantial mortgage payment hikes upon remortgaging.

Higher fixed rates also made it more challenging for first-time buyers to enter the property market.

However, the average two-year fixed-rate deal is continuing to decline.

According to MoneyFactsCompare.co.uk, a typical two-year fixed rate in November 2022 was 6.47%, but it has now fallen to 5.39%.

Unfortunately, brokers do not think rates will ever return to record lows of 1 or 2%. 

Rachel Springall, finance expert at MoneyFactsCompare.co.uk, said: “Borrowers who are due to come off a cheap fixed rate deal will be on tenterhooks for mortgage rates to drop before they refinance, but if they have some months ahead to wait, it may be wise to consider overpaying.

“Over the course of the past 12 months, mortgage rates have been coming down and the average two-year fixed rate has dropped by almost 1%.

“The incentive to switch away from a SVR remains prevalent, as on average the rate sits just shy of 8%.

“A typical mortgage being charged the current average SVR of 7.95% would be paying £403 more per month, compared to a typical two-year fixed rate.”

David Hollingworth, associate director at L&C Mortgages added: “There are still some extremely sharp rates on offer with some rates still available below 4% but these are bound to be feeling the pressure. 

“Applying for a deal will secure the rate and avoid any further increases. 

“At the same time they can still review the deal if rates do subsequently drop back.”

How to get the best deal on your mortgage

IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.

There are several ways to land the best deal.

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Usually the larger the deposit you have the lower the rate you can get.

If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.

Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.

A change to your credit score or a better salary could also help you access better rates.

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And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.

You can lock in current deals sometimes up to six months before your current deal ends.

Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.

But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.

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To find the best deal use a mortgage comparison tool to see what’s available.

You can also go to a mortgage broker who can compare a much larger range of deals for you.

Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.

You’ll also need to factor in fees for the mortgage, though some have no fees at all.

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You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.

You can use a mortgage calculator to see how much you could borrow.

Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.

You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.

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CREDIT CARDS AND LOANS

When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can also fall.

However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.

Lower interest rates can result in reduced annual percentage rates (APRs) on credit cards, making it more affordable to carry a balance.

However, it’s important to remember that multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.

Your lender will let you know before making any changes. 

SAVINGS RATES

Savers have been the primary beneficiaries of rising interest rates.

This is because banks often compete to offer market-leading rates, although they can be slower to pass these benefits on to customers.

However, falling interest rates spell bad news for those with savings.

Banks and building societies have already been preparing for future rate cuts and have started cutting rates in recent months.

According to Moneyfacts, the average easy-access savings account rate in November 2023 was 3.19%, compared to 3.03% today – down from 3.15% in August.

Not all savings account rates will fall immediately, though, so you could still lock in a good deal now.

Holly Tomlinson, financial planner at Quilter, said: “Currently, there are still some accounts paying as much as 7%.

“These won’t be around for long so having a careful look at your finances sooner rather than later is worthwhile.”

Analysis by Shawbrook Bank suggests there are 1.4million savers with fixed deals ending before January.

According to Adam Thrower, the bank’s head of savings, failing to switch accounts now “could be costly” for these savers.

However, ensure that you withdraw your cash only at the end of your fixed term. Otherwise, you will incur a penalty.

You can shop around for the best savings rates by using price comparison sites like Compare the Market, Go Compare, and MoneySuperMarket.

PENSIONS

The BoE’s base rate also impacts pensioners looking to buy an annuity.

A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.

However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE’s base rate can impact the rate you receive.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.

However, Holly Tomlinson added: “Reducing the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.

“Those nearing retirement should consult with a financial adviser to assess the timing of annuity purchases and explore other retirement income options.”

We’ve previously explained how to ensure you get the best deal for your retirement.

The Bank of England (BoE) has announced a cut to its benchmark interest rate, lowering it from 5% to 4.75% – the Monetary Policy Committee vote was – 8:1. This is the second consecutive rate cut in recent months, aimed at boosting economic activity and addressing a softening inflation landscape. The decision, closely watched by markets, businesses, and consumers, reflects the central bank’s focus on supporting economic stability during uncertain times.

Why the Bank of England Cut Rates to 4.75%

The BoE’s decision comes on the heels of new economic data showing a significant cooling of inflation. In September, the UK’s annual inflation rate fell to 1.7%, marking the lowest level in over three years and well below the government’s 2% target. The unexpected drop in inflation, combined with slowing wage growth, provided the Monetary Policy Committee (MPC) with the justification needed to reduce rates once again.

What the Interest Rate Cut Means for Borrowers

Lowering the base interest rate has immediate implications for borrowers. Homeowners with variable-rate or tracker mortgages are expected to see reductions in their monthly payments, providing some relief as the cost of living continues to challenge many families. While fixed-rate mortgage holders may not experience immediate benefits, new deals could gradually become more competitive as lenders adjust to the BoE’s move.

High Street banks and other lenders are likely to lower rates on personal loans, credit cards, and other borrowing products, making access to credit more affordable. For individuals and businesses, this could stimulate spending and investment, boosting economic activity.

Related:UK Housing Market Sees Homes Selling Quicker in October 2024 

Impact on Savers: Reduced Returns Expected

Unfortunately, the news isn’t as positive for savers. Interest rate cuts typically lead to lower returns on savings accounts, ISAs, and other interest-bearing accounts. The current average rate for an easy-access savings account, around 3%, may soon see reductions as banks adjust to the new base rate.

To mitigate the impact of reduced rates, savers may need to explore alternative options such as fixed-term accounts, bonds, or investing in diversified portfolios.

Related:Share Tips 2024: Finance Monthly’s Leading Selections for This Week

Future Outlook for Interest Rates

While today’s rate cut to 4.75% demonstrates the BoE’s commitment to stimulating growth, uncertainty about future interest rate movements remains – particularly as there is likely to be increased economic demand given the recent budget. Key factors such as inflation trends, wage growth, and global economic conditions will play pivotal roles in shaping the BoE’s next steps. The central bank’s goal is clear: to provide a supportive economic environment without allowing inflation to spiral out of control.

Practical Steps for Borrowers and Savers

For borrowers, this rate cut presents an opportunity to reassess their financial options. Those with variable-rate mortgages should see immediate relief, while others may want to consider refinancing or exploring new deals. On the other hand, savers will need to evaluate their portfolios and consider strategies to maximize returns in a low-interest-rate environment.

October saw the UK host a major investment summit aimed at attracting more money into the many investment opportunities our country offers.

But it wasn’t just prime minister Keir Starmer and chancellor Rachel Reeves making the case for inward investment; we also had the hugely successful American businessman and politician Michael Bloomberg “convinced the future’s bright for Britain”.

Now, when our clients invest, they expect a regular income from their asset in the form of interest and/or dividend payments. Those investing for the long term can move away from the safety of bank deposits into bonds and equities from which we can hope for capital gains too.

Many moderate risk investments will deliver these gains over time, even though their month-by-month asset value growth progression may deliver a saw-toothed graph rather than a smooth incline.

However, occasionally, some of your clients’ investment portfolios may enjoy a windfall gain.

With a defined contribution pension, such as a SSAS or Sipp, the gain is all theirs

Perhaps a pharma company has completed clinical trials on a new drug and found it helps with some cancers and is free of unwanted side effects. Great news for society and a windfall investment gain for those that put money into the company to enable it to research and develop new treatments.

If it was some of your clients’ pension assets that enjoyed this windfall gain, then what happens to the money depends very much on what sort of pension they have.

With a defined contribution (DC) pension, such as a SSAS or Sipp, the gain is all theirs. It will show up immediately in their pension pot if you have advised them to invest directly in the shares. Or it will show up the very next day if they invested via a fund with daily pricing.

If they are age 55 or older, they might choose to take that windfall amount out straight away, less tax, and celebrate by buying the thing they’ve always wanted that’s always been just out of reach.

CDCs give each member an immediate increase to their annual pension amount where schemes benefit from a windfall

However, with a defined benefit (DB) or final salary pension, it’s pretty much the opposite.

DB pensions are ‘balance of cost’ schemes, in which the employer contributes whatever it costs to provide the promised pension. A windfall investment gain typically means the employer can reduce pension contributions, while the members’ benefits remain unchanged.

Today, it may simply accelerate the progress towards scheme buy out with an insurance company – whereupon those benefits become fixed in stone.

With a collective DC (CDC) scheme (there is now one single employer scheme live in the UK – Royal Mail – and a lot more coming as the government unfurls the legislation for multi-employer CDC) it’s a lot more complicated.

Two-thirds of retirees today are living as couples and, for many of them, the gender pensions gap is all too real

CDCs give each member an immediate increase to their annual pension amount where schemes benefit from a windfall. This will be of most value to those on the cusp of retirement, who are about to receive it and have many years of retirement income ahead of them.

However, it will be of much less value to the very old with not long left to draw on their CDC pension, or to young members with decades to go before they draw a pension.

Let’s return to DC schemes for a concluding thought, as that’s where most of your clients are saving for retirement today.

When your clients tot up any windfall investment gain and cry out “it’s all mine!”, do remind them of their obligation to support their spouse or partner’s retirement income as well.

After all, two-thirds of retirees today are living as couples and, for many of them, the gender pensions gap is all too real.

Adrian Boulding is director of retirement strategy at Dunstan Thomas

A SUPERMARKET giant has slashed the price of a litre of Baileys to just £8.50.

Fans of the Irish cream liqueur will be delighted that the cost has been cut ahead of the festive season.

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Morrisons shoppers will be able to get their hands on the discounted drink when they spend £45 or more in store.

But they will need to act quickly as the deal is only on from November 8 to November 14.

Customers in England and Wales will be able to get their hands on the beverage for £8.50 while those in Scotland can pick up a bottle for £11.05.

This is a 61% saving on the usual £22 price tag.

Britain’s coupon kid Jordan Cox said every year there is a Baileys price war among supermarkets which usually happens around November.

He said: “The standard price drop is usually down to £10 for a 1L bottle… or £9.50 if we’re lucky. So for Morrisons to drop the price to £8.50 is quite astonishing!”

The Morrisons deal is especially good as supermarket prices have been naturally increasing over the years, he added. 

Just this week Sainsbury’s halved the cost of a 1 litre bottle to only £10.

The deal is only available to those with a Nectar Card as part of its Nectar Prices.

Meanwhile, Tesco Clubcard customers can pick up a bottle of Baileys for £13.

The offer is valid for delivery from now until December 9.

Supermarkets have increasingly only offered these deals to shoppers who have registered for their loyalty programmes to encourage more people to register.

Shoppers have complained that this is annoying as they could previously get the offers without needing to sign up.

The Morrisons deal is also only available to shoppers who have joined the supermarket’s loyalty scheme and have a More Card.

It is easy to sign up for the loyalty programme, which is free to join.

Go to the Morrisons More website and enter a few details such as your address, email and mobile number.

Once you have registered you will be sent a More Card and can download the supermarket’s app.

You will then receive offers which will give you money off your next shop.

To get the prices in store just scan the barcode on your card or in the app.

You will also be able to earn points on your spending which can be converted into coupons.

Once you reach 5,000 points you convert them into £5 vouchers called “Fivers” which you can spend in store or online.

If you do not have the app then your Fiver will be printed in store.

When you scan your card or app you will also be in with a chance of bagging a “Basket Bonus” which could give you money off your next shop or free treats.

How else to save on Baileys

To make your pounds go further you could always opt for a Baileys dupe, which is similar to the real thing.

You can pick up a 700ml bottle of Ballycastle cream liqueur from Aldi for £4.99.

A litre of the beverage would cost £7.13, which would save you £1.37.

The Ballycastle range comes in several flavours including Chocolate Clementine, White Chocolate and Milk Chocolate Peanut Butter.

All these flavours can be picked up for £7.49.

Other supermarkets including Sainsbury’s, M&S and Lidl also have their own Baileys dupes.

Sainsbury’s 700ml Irish Cream Liqueur costs £13 but Nectar card holders can pick it up for £10.

It would cost £14.28 for a litre, making it more expensive than a bottle of the real deal from Morrisons.

Meanwhile, a 700ml bottle of Carthy’s Country Cream liqueur costs £6.70.

For a whole litre it would set you back £9.57, making it more expensive than a bottle of Baileys from Morrisons.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

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