Harry Rose, Which? Money Editor, said: “There are always winners and losers with base rate cuts. Borrowers are more likely to be better off after a rate cut, as lenders may offer loans and mortgages at lower rates. However, not all tracker mortgages will automatically drop, so it’s worth checking with your provider.
“For savers it could mean a further drop to the already woeful rates on their savings so shop around to see if you can get a better deal. Cash savers may want to consider fixed-rate savings bonds, which typically have higher interest rates, but be prepared to have to lock away your savings for a fixed period in return.”
Whether you’re a saver or a borrower, it’s a good time to review your finances and consider whether you’re better off sticking with your current arrangements or switching to make more of your money.
- Think about investing: If you don’t invest already, now might be a good time to think about it. If you have at least six months’ worth of expenditure in savings, it might make sense to think about investing in riskier assets. Dividend-paying shares and interest-paying bonds currently offer inflation-beating returns, although remember you could lose money.
- Diversify your investments: A balanced investment portfolio will contain a mix of equities (shares in companies), government and corporate bonds (loans to governments or companies), property and cash. Having a mix of different asset types will help you to spread risk.
- Pay off your debts: It’s always a good idea to pay off as much debt as you can, particularly in times of low interest rates when you’re unlikely to earn more on savings than you will pay on your borrowings. And when rates start to go back up you want to have the lowest level of debt possible.
- Fixed-rate mortgages: Fixed-rate mortgages tend to appeal to people on tight budgets who want to know exactly what their outgoings will be each month, as well as those who enjoy longer-term financial stability. They’ve also been popular over the last couple of years because it was generally thought that the base rate would increase, so people wanted to lock in to the low rates on offer. With a base rate cut and possible lower fixed rates coming on to the market, people who can afford to may want to switch. Others will undoubtedly still see the potential long term benefits of fixing in what could potentially be an unstable economy.
- Tracker mortgages: Following a base rate reduction we would expect mortgage rates to come down, so people who can afford to do so may take a chance on tracker products in order to try and pay as little interest as possible. Many tracker rates come with no early repayment charges and so a tracking rate potentially gives the best of both worlds: a cheap payment now, the ability to review and the opportunity to move to a fixed rate when, or if, rates start to increase. However, this option needs you to be on top of your finances and may not be suitable if you’re on a tight budget. Also, when and if you do switch products you may be liable for further fees. It’s also worth noting that some tracking rates have collars on them meaning if the base rate drops, you might not have your rate of interest reduced by the same margin, or at all. It always pays to make sure you fully understand how your mortgage product works before signing up.
- Overpaying your mortgage: It makes sense to overpay your mortgage if you’re in a position to do so when rates are low, as when rates start to go up again you’ll want to have the lowest level of mortgage debt possible.
- Visit which.co.uk/mortgagetypes for more advice on the pros and cons of different types of mortgage.