Bank of England interest rate cut a welcome relief

With the pressure mounting on the Bank of England to restore confidence in banks and encourage consumer spending, today it announced a drop in its base rate of interest by 0.25 per cent to 5.25 per cent.

The idea is that borrowing is cheaper, spending increases and confidence in the economy is restored.

But it’s hardly a surprise and a 0.25 per cent decrease is nothing compared to the whopping 1.25 per cent knocked off the cost of borrowing by the USA’s Federal Reserve. If you’re an American homeowner, that could mean saving up to £120 a month off your mortgage repayments.

This time last year rates were at the same level that they are now – but let’s not forget that we’ve now had two rate cuts in three months – so has anything changed? talks you through the options.

I’m a homeowner

The most immediate impact will be on homeowners with mortgages on variable or tracker rates – the effect of two rate cuts in three months will be considerable.

The average mortgage holder would save around £554 a year and will reduce their monthly repayments by nearly £50 a month as a result of the 0.5 per cent drop in interest rates in recent months.

So a cut in the base rate is bound to be welcomed by homeowners, but sadly it won’t be causing street parties and jubilation. A base rate of 5.25 per cent means average standard mortgage rates are still up on recent times – not counting last year you have to look back to 2001 to find a time when rates were this high.

In particular, if you’re coming to the end of your fixed rate deal, you may well be concerned about how you will cope with the extra cost of repayments when your deal expires. Three years ago rates were as low as 3 or 4 per cent – now you’ll be lucky to get a fixed rate below 5 per cent.

If you’re thinking of shopping around for a cheap deal for when your mortgage expires, click here to compare the best rates to find a mortgage that best suits your needs.

I’m a saver

Just like in December, a further cut in interest rates is not good news if you’re a saver. Although a base rate of 5.25 per cent is healthy enough. Barring the recent ups and downs, savers haven’t had it this good since May 2001.

Nevertheless if you do have a savings account or an ISA it’s crucial that you make sure you have put your money in the right place. A current account, for example, is probably the wrong place to put your extra cash. Many current accounts pay less than 0.5 per cent and that hardly makes your money work hard for you.

A far better option is a savings account. And with online accounts now more competitive than ever – and increasingly popular – it’s worth shopping around on the internet to find the best rate for you. You could be benefitting from anything from 5.5 per cent to 12 per cent, depending on your needs.

So obviously the first place to check for a great rate is your own bank. If you want to search around and compare the market, click here and we’ll help you choose the right savings account for you.

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