The Bank of England’s decision to lower interest rates may allow some struggling with the cost-of-living to breathe a sigh of relief, but for others it should prompt swift action.
While Trustnet has already covered how different asset classes will be affected, the rate cuts have far wider implications than just investing, with many aspects of personal finances impacted. Unfortunately, there isn’t much to cheer about.
First up is mortgages, where there could be some relief to the housing market. Scott Gardner, investment strategist at Nutmeg, said those with mortgages coming up for renewal should get a slight reprieve, although Charles Stanley chief investment analyst Rob Morgan noted that households will still be “hoping for further interest rate cuts”.
But they shouldn’t count on it, with Morgan suggesting rate cuts would be a case of “fine-tuning rather than deep” thanks to the “stickiness of inflation and wage growth”.
Laura Suter, director of personal finance at AJ Bell, added that there could be a hold-up in the mortgage market, where “companies are quick to pass on rate increases with rapid speed but far more sluggish to pass on rate cuts”.
With an estimated 1.2 million people on tracker mortgages and standard variable rates, according to interactive investor senior personal finance analyst Myron Jobson, the impact may be minimal.
Suter said some providers are launching sub-4% rates and others will follow suit as competition heats up again in the market. This means someone with a £125,000 tracker mortgage over 25 years will see around a £17 drop in their monthly payments as a result of a 0.25% cut today.
Of course, the reverse is true when it comes to savings rates. Having written about why now is the time to lock in rates, banks will likely be quick to cut their rates on current accounts following yesterday’s announcement.
Jobson said: “Britons have been earning more on their savings following the interest rate cycle, but the rate cut is likely to change the story. With further rate cuts in the not-too-distant future a distinct possibility, the simple message for savers is: act quickly to secure the best deals before they vanish.”
And then there is the Labour party’s first Budget at the end of October in which chancellor Rachel Reeves is anticipated to raise taxes after hinting at such earlier this week. The only thing we don’t know is which ones.
Income tax is unlikely, as is inheritance tax, with the UK already home to one of the biggest ‘death taxes' in the world. But capital gains tax (CGT) might appear an obvious place to look, said Suter, while stamp duty may also be in the firing line.
So it seems we should continue to tighten the purse-strings and save for the inevitable rainy days ahead - despite the sun so gloriously shining at the moment. If you can, doing this through a stocks and shares ISA can yield higher returns, particularly over the long term, but locking in those cash rates now is also sensible if you have money to spare.