The Bank of England’s Monetary Policy Committee has voted to cut the base rate by a quarter of a percentage point in February, taking it from 4.75% down to 4.50%.
Rates have only been cut three times since summer last year, with the first reduction having been made in August 2024 and the second in November. The Committee voted by 7-2 to reduce the base rate by a quarter point this month, with two members voting for a half a percentage point cut. The reduction is welcome news for homeowners on tracker and other variable mortgage rates, who will see a reduction in their monthly costs. It is less positive for savers, although they currently still have a wide choice of accounts offering inflation-beating returns.
The past few years saw rates rise 14 times in a bid to curb rampant inflation, but with inflation easing slightly to 2.5% in the 12 months to December (although it subsequently jumped to 3% in January) and economic growth faltering, the Committee decided now was the right time for a rate cut.
Nicholas Hyett, Investment Manager at Wealth Club, said: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
“Against that backdrop the Bank’s decision to cut rates is no surprise and was widely expected. Rate-setters, and the government, will be hoping a 0.25% cut provides the post January pick-me-up the economy needs – though some MPC members voted for a more radical reduction.
“However, the real risks in the future are largely unknown. Will Trump’s trade war rock the global economy? Will the UK become a tariff target? How many jobs are at risk from rising labour costs? Will the Chancellor hike taxes again in the spring? With all those unknowable risks out there, this rate cut could be seen as much as a shot in the dark than a shot in the arm.”
Here, we explain what rates being reduced to 4.50% in February might mean for you, and how it’s likely to impact your finances.
Your savings
Savings rates remain competitive for now, but February’s rate cut makes it more important than ever for savers to take advantage of high returns whilst they’re still available.
Jenny Ross, Editor of Which? Money, said: “Savers should review their accounts, as it’s likely banks will be quick to slash the rates on instant-access products. Be sure to shop around for the best rates to ensure your money is working as hard for you as possible – our research has found that digital banks and building societies have consistently outperformed traditional high street banks’ rates, so remaining loyal to one provider could be a costly mistake.”
You can find the current best fixed savings rates in our article Fixed rate savings bonds explained and the best cash ISA rates in our guide Best cash ISA rates – which cash ISAs pay the most interest?
Those with longer-term savings goals – more than five years and preferably at least 10 – and who are comfortable accepting a level of risk, may want to consider investing some of their money in the hope of generating inflation-beating returns. However, remember that there’s a chance you could get back less than you put in, so investing isn’t for the faint-hearted.
Find out more about whether investing some of your savings could be right for you in our guide Investing – the basics.
What you can do
As mentioned, it’s essential to make sure your savings are working as hard as they possibly can for you, as often banks lure savers in with tempting rates only to reduce them a few months later.
Check savings websites such as SavingsChampion or Raisin, or price comparison sites such as Moneyfactscompare.co.uk, uSwitch or GoCompare to see if you can find a higher interest paying account to move to.
If you have money in a fixed rate savings account and you think you could do better elsewhere, check what the penalties are for closing your account. In some cases it may just be a few months’ interest and you may be better off moving your money to an account paying higher returns.
Your pension
If you’re approaching retirement and considering using some or all of your pension savings to buy an annuity to provide you with an income, rates are likely to fall following today’s announcement.
Holly Tomlinson, financial planner at Quilter, said: “Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes. A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees. Those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.”
That said, latest data from the Hargreaves Lansdown annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee, so they continue to provide great value for now at least.
Learn more in our guides Annuities explained and Why it pays to shop around for your annuity.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Your mortgage
The Bank’s decision to reduce the base rate to 4.50% is positive news for homeowners, many of whom are facing a sharp jump in their monthly payments when their fixed rate deals come to an end.
Frances Haque, Chief Economist at Santander UK, said: “The cut to the Bank of England base rate will come as some light relief to those homeowners with fixed rate mortgages maturing this year, and should see a boost to overall household confidence, following a period of decline at the end of 2024. While this is a positive story overall, with rates sitting lower than they were two years ago, borrowers coming off five-year fixed terms will still be moving to rates significantly higher than their current rate.
“With house prices set to continue to rise, albeit at a slower pace, and mortgage approvals remaining strong, spurred on by the upcoming change to stamp duty, we are however looking towards a more buoyant housing market as we progress through the year.
“Our forecasts are still pointing to a further three cuts this year – with the next to come in May, allowing the Bank of England to strike a balance between containing inflation, while boosting economic growth, and with that, supporting household confidence and the mortgage market.”
You can find out about remortgaging in our article Should I remortgage now? and why mortgage rates move even when the base rate has stayed the same in our guide What are swap rates and how do they affect my mortgage?
What you can do
If you’re on a standard variable rate (SVR), you should remortgage to a cheaper deal if possible, as SVRs are usually the most expensive mortgage rates. You might also want to start looking round for a new deal now if your current mortgage deal is due to end in the next few months, as you can usually secure your next mortgage three to six months before you want it to begin.
If you’re planning to remortgage and are looking for a place to start, we have a mortgage affordability calculator, which will give you a rough estimate of what you might be able to afford, based on current market conditions.
Once you have a rough estimate, it can be helpful to compare different mortgage options to understand what your monthly repayments are likely to be.
Unless your situation is very straightforward, you may want to seek professional advice from a broker to find the best mortgage option for you. The advantage is that they will know which banks and building societies are more likely to accept your application. It’s definitely worthwhile if you are self-employed (unless you have been so for years) or your credit rating isn’t excellent.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
If you’re finding it hard to keep up with your mortgage repayments, please don’t suffer in silence. Our article What can you do if you can’t pay your mortgage? explains what to do if you’re struggling with higher costs.
Your credit card and loans
Borrowing costs are likely to remain high for now despite this month’s rate so it’s important not to take on more debt if you can possibly avoid it.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online
investment platform, said: “Consumers should not consider a third interest rate cut as a green light to splash out on big-ticket purchases that may have been put on the backburner for some time.
“Uncertainty about the wider economic outlook and the future of interest rates still reigns, so running down emergency funds or borrowing to fund a major lifestyle cost should always be assessed very carefully to ensure repayments are fully affordable over the long term.”
What you can do
If you’re paying a high rate of interest on your credit card borrowing, try and get a 0% balance transfer credit card deal, so that you can pay off what you owe without being hit by hefty interest charges. Remember though that you must try and clear your balance in full before the introductory 0% period ends, or you’ll start being charged interest.
If you can’t get one, you have the right to reject the interest rate rise within 60 days and close your credit card account. The credit card company must then give you a reasonable time to pay off the money you owe.
If you’re worried that you won’t qualify for a 0% credit card deal, there are several credit checker and credit matcher tools available – and some credit card companies will also give you an indication of whether you’d be successful before you apply.
You can find the current best balance transfer credit card and personal loan rates in our guide Balance transfer credit cards and personal loans compared.
If you have a loan which you want to pay off quickly, lenders must allow you to do this, although you may be charged an early repayment penalty to do so. Lenders can charge you up to two months extra interest if you choose to pay back your loan off sooner than planned. If your loan has less than 12 months left to run, they can only charge you a penalty of up to one month’s interest if you pay it off early.
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