The Bank of England's recent decisions on interest rates have significant implications for both borrowers and savers. As the base rate fluctuates, it directly impacts the cost of borrowing and the returns on savings.

What is a 'base rate'?

The base rate is the interest rate set by the Bank of England. It is the minimum rate at which commercial banks can borrow money from the central bank. It serves as a benchmark for the interest rates that lenders charge on loans and mortgages, as well as the rates offered on savings accounts.

By adjusting the base rate, the Bank of England can influence borrowing and spending behaviours, which in turn affects economic activity. For example, a lower base rate generally makes borrowing cheaper and saving less attractive, encouraging spending and investment. At the opposite end, a higher base rate can make borrowing more expensive and saving more rewarding, which can help cool down an overheating economy.

Let's explore what these changes could mean for you.

For Borrowers

• Mortgage Rates: If you have a variable-rate mortgage or are looking to take out a new mortgage, changes in the base rate will affect your monthly payments. However, fixed-rate mortgage holders will not see a change to their payments until their fixed deal expires.
• Personal Loans and Credit Cards: Borrowing costs for personal loans and credit cards may also be influenced by base rate changes. A lower base rate can mean lower interest rates on these products, making borrowing cheaper. This can be beneficial if you're planning to take out a loan or carry a balance on your credit card.
• Business Loans: For businesses, lower interest rates can reduce the cost of financing, encouraging investment and expansion. This can be particularly advantageous for small businesses looking to grow.

For Savers

• Savings Accounts: On the flip side, savers might find that the interest earned on their savings accounts decreases when the base rate is cut. Banks typically pass on lower rates to savers, which means your savings might not grow as quickly. Consider shopping around for the best rates and looking at alternative products (for example, fixed term savings or ISAs). Please read the terms and conditions of any product carefully to ensure it meets your requirements.
• Investment Returns: Lower interest rates can also affect the returns on other investments, such as bonds. With lower yields on bonds, investors might seek higher returns in the stock market, which can be more volatile.
• Inflation Impact: While lower interest rates can stimulate spending and borrowing, they can also lead to higher inflation. If inflation rises, the real value of your savings could decrease, meaning your money won't go as far in the future.

Building Long-Term Financial Health

Regardless of whether you're a borrower or a saver, it's crucial to stay informed about interest rate changes and adjust your financial strategy accordingly. Here are a few tips:

• Review Your Mortgage: If you have a variable rate, you have the option to speak to a financial adviser who can help you see whether considering switching to a fixed-rate mortgage might provide more stability.
• Shop Around for Savings:  You have the option to search for more suitable savings accounts that offer higher interest rates or better flexibility on savings accounts and consider diversifying your investments to balance risk and return.
• Plan for Inflation: There is research available online about inflation trends should you wish to consider how they might impact your long-term financial goals.

Changes in UK interest rates have a broad impact on both borrowers and savers. By staying informed and proactive, you may be able to make decisions in advance of these changes to give you additional assurance over your finances.

Andrew Phillips, Managing Director, V12 Retail Finance, sees potential for positivity moving into 2025: "Inflation in the UK took an unexpected dip to 2.5% in December, down from 2.6% in November. Core inflation also fell more than expected, dropping to 3.2% from 3.5%. This, along with the fragile state of the economy, might prompt the Bank of England to consider a rate cut as early as next month.

Currently, the Bank's interest rate is at 4.75%, following two cuts last year. Another reduction would likely be a welcome relief for those planning big purchases. Borrowing costs, including credit card rates and bank loans, have been high for the past couple of years, so a rate cut could provide much-needed relief for many."

If you'd like to learn more about the types of finance we offer click here to read more about ways you can spread the cost using V12 Retail Finance. If you'd like to learn more about Secure Trust Bank savings products, click here.