We’ve now got the lowest ever interest rate in the UK, a tiny 0.25%.
My twenties weren’t spent paying attention to interest rates, so I don’t actually remember a Bank of England (BoE) base interest rate higher than 0.75%. Over the last 11 years it’s typically been at 0.5% – the rate it fell to in 2009 after the crash.
But thanks to the market falls following worries over Coronavirus, the BoE took the dramatic decision to drop rates from 0.75% to 0.25%. (UPDATE 19/3/2020 – it’s been cut again to an all-time low of 0.1%). It’s a big drop all at once when compared to changes over the last decade.
So why does this matter to you and me? Well, savings accounts, mortgages and loans are just a handful of financial products which are set based on the base rate.
So when the rate was around 5% in 2006, or 15% in 1989, the individual interest rates on each of those reflected it. Good for savers, not so good for borrowers.
Now we’ve got such a low base rate, already very low-interest rates on savings accounts will likely be cut even further, while some of the lowest ever mortgage rates could drop too.
So here’s what I’m doing with my finances as a result, and some suggestions to make sure you’re getting the best deal.
As I’ve written about a few times, I keep all of my savings in a series of current and regular savings accounts. These rates have been falling so there are a lot less of them available right now. My best paying accounts are with TSB, though that 3% rate is due to drop to 1.5% in May.
Nationwide’s FlexDirect offers 5% for one year on balances of £2,500, but I used that years ago. However, it’s possible to also get the rate on a joint account, so I’ll be quickly applying for one of these in case the offer changes.
I’ve also opened up a First Direct Regular Saver for 2.75% (which has already been cut from 5% this year) following my previous one maturing recently.
These accounts will cover my savings so I’m not bothering with opening up a fixed-rate account.
If you haven’t already gone for a Nationwide FlexDirect account I’d recommend going for it sooner rather than later.
You might also still be able to get a fixed-rate account for a year or two which pays around 1.55% – though these are likely to be cut at any time if they haven’t already.
In fact, if you’ve got savings in an ISA or savings account other than one of those special high-interest current accounts it’s never been more important to check the rate you are getting.
It’s highly likely it’s less than you got when you first put your money away. You’re probably getting next to nothing. Move your money to a better paying account if that’s the case, though bear in mind those rates could drop too.
I feel quite lucky with my mortgage. I’ve got a tracker running at 1.49% plus the base rate. So while rates are low, I’m not paying too much interest on the money I borrowed.
And the cut means I’ll be paying 0.5% less each month. It’s not a huge amount but worth a couple of hundred pounds a year – while rates stay this low.
However when we moved house I took out an extra mortgage on top, and this time I took out a 10-year fix. It’s still a low rate, but potentially if I’d got another tracker I’d be saving more every month.
But of course they could easily change again. At some point they’ll also have to go up. Though it’s unlikely right now, if rates went up to 3.25% in a few years, my monthly payments would jump by £180 – that’s £2,160 a year.
Now, this might not be for ages, but I’m going to take advantage of the low rates to overpay as much as I can on my mortgage.
I stopped overpaying when we moved as we had extra costs, but I’ve started again. Doing this each month reduces the length of the mortgage and lowers the overall interest I’ll pay. And the rate cut means if I keep paying the same amount as I was, I’ll be overpaying by even more.
If you’ve got a low rate mortgage too and are able to overpay (some mortgages won’t let you, have limits or charge fees), I think it’s a good time to do it. Money Saving Expert has a great overpayment calculator to help you see how much money you’ll save overall, and how much sooner you’ll pay off your mortgage. However, it might be better to clear any expensive debts instead.
It’s also a good time to think about remortgaging if you’re on a standard variable rate mortgage, or your fixed deal is ending soon. Though it might take a few days for rates to adjust, take look at the deals available. Take into account the fees charged for setting up a new mortgage, as the lowest rate might not be the cheapest option.
But, before you make any decisions, do talk to a mortgage advisor.
Ok, so I’m really lucky – the only debt I have is my mortgage.
I suppose saying lucky isn’t quite right – I’ve always been good with money, and that’s meant I’ve planned for big expenses and not bought things I can’t afford. But it means there’s nothing for me to do here as a result of the cut.
I know some of you won’t be in the same situation as me for whatever reason. So what could you do?
Well it’s unlikely much will change on your existing debts, but since savings rates are so low it almost certainly will be better for you to clear debts than try to make money through savings.
But don’t completely ignore savings. I’d always say you should try to build up a bit of an emergency buffer. You never know what could happen and having access to some cash if you really need it would usually be better than borrowing more money.