Hopes of another interest rate cut have been dashed after the Bank of England held them at 5%.
Coming despite a hefty rate cut in the US by the Federal Reserve, the UK central bank’s decision follows the news that the rate of price rises across the economy remained at 2.2% in August. There are still expectations that the base rate will come down later in 2024. The next Bank of England decision will be released in November.
The news has put a small dent in the optimism we saw back in August. Back then, the Bank of England’s decision to cut interest rates for the first time since 2020 prompted a wave of mortgage rate cuts, whilst also hitting savings rates.
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But what exactly was the impact of this previous decision? Analysts at Moneyfacts have crunched the numbers to give us an indication of what to expect if the economists on Threadneedle Street opt to cut rates again later in 2024.
What was the impact of the August interest rate cut on mortgages?
Up until the summer base rate cut, the mortgage market was offering prospective buyers little respite. Rates had climbed throughout the spring and were plateauing at a high level. But the cut to interest rates changed lender pricing.
Moneyfacts’s data shows average two-year fixed rates were 5.77% by 1 August 2024 - 0.01 percentage points higher than at the beginning of March 2024, but significantly below the 6.7% average recorded at the start of September 2023.
By early September 2024, rates were 5.56%. While this marks a big fall, mortgages are still much more expensive than they were before the crisis began (2.34% in December 2021) and in the pre-Mini Budget period (4.24%).
Although rates have come down, ‘normal’ market conditions have not yet returned. Five-year fixes continue to be cheaper than short-term deals - a reversal of what we saw before interest rates began to climb in the winter of 2021/22.
Back then, five-year rates were 0.3 percentage points above two-year deals at 2.64%. But as of the start of September 2024, medium-term deals were 0.36 percentage points cheaper than two-year fixes at 5.2% (down from 5.38% in August). The gap between two and five-year terms has closed somewhat, given Moneyfacts shows that it stood at more than half a percentage point in September 2023.
The other key difference the analysis shows is that standard variable rate (SVR) mortgages - the sort of deals you fall onto when your fix expires - have reduced. In August, the average rate was 8.16%. But by September it was 7.99%. This stands to benefit those who are taking a wait-and-see approach to remortgaging.
What do the figures mean for your mortgage?
According to Rachel Springall, finance expert at Moneyfacts, interest rate cuts could be on the way in November. This could mean better news for prospective borrowers is on the way - although she cautioned people about the perils of an SVR deal.
She says: “New or existing borrowers will ideally want to see mortgage rates fall further in the months to come, particularly if they are about to come off a cheap fixed deal. Any borrower looking at their options today for peace of mind could lock into a fixed mortgage early, but it would be understandable for some to adopt a wait-and-see approach, hoping rates will come down by bigger margins.
“However, when falling off a cheap rate onto a revert rate, borrowers will typically see their monthly repayments rise. So, seeking advice to weigh up all their options before their deal ends is essential. A typical mortgage being charged the current average SVR of 7.99% would be paying £383 more per month (£1,927), compared to a typical two-year fixed rate (£1,544 per month).”
These calculations are based on a 25-year, £250,000 mortgage. Springall adds that any people coming up to the expiry of a two-year rate “may be pleased” given the market is “much more stable” than it was around the time of Liz Truss’s Mini Budget.
What was the impact of the August interest rate cut on savings?
While prospective and existing homeowners are likely to be feeling happier about the state of the mortgage market, savers are being forced to scramble to take advantage of decent rates before they disappear.
Average savings rates have begun to drop since the August rate cut. Easy access accounts were 0.07 percentage points down in early September (3.08%) compared to the start of August. Easy access ISAs have fallen by the same amount to 3.29%, while notice ISAs have fallen 0.14 percentage points to 4.08%.
However, these rates are still much better than what you could get in December 2021 - and even as recently as September 2023. A typical easy access savings account would have netted you interest at a rate of just 0.2% in late 2021, with rates at an average of 2.96% by the time of the Mini Budget.
Meanwhile, for easy access ISAs, the rates on offer in December 2021 were 0.26%, rising to 3.04% by September last year. Springall says that while providers have tended to cut rates, they have not dropped by the full 0.25 percentage point cut the Bank of England made in August.
What do the figures mean for your savings?
Springall has urged savers to take action to ensure they get a good rate while they last. She says ease of access and loyalty may not be the best policies at the moment: “Savers would be wise to review their pots considering the base rate cut to ensure they’re still paying a competitive return.
“Easy access accounts remain a popular choice among savers for their flexibility, but the convenience of using one of the biggest high street banks can come at a cost. The average easy access rate paid across the biggest high street banks is 1.93%, which is less than the current market average easy access rate across all savings providers. Loyalty does not always pay, so savers would be wise to seek out the top rates from the more unfamiliar brands.”
She adds that with expectations of two more interest rate cuts coming this year, savers must consider locking their cash away to secure the best returns. “There is an expectation that [the] base rate will be cut twice more before the year is over, so savers need to prepare themselves for more interest rate cuts. Those who are happy to lock their cash away for a guaranteed return could look towards a fixed rate bond or fixed Cash ISA, and with rates expected to decrease further, savers may wish to choose a longer-term deal,” she says.
“Challenger banks and building societies continue to offer some of the top returns and have the same deposit protections in place as the more familiar high street banks, so there is little reason to overlook them in favour of a well-known brand. Whichever account savers decide to open, it’s essential they pick one that suits their needs, but if it’s an easy access account, make time to review the rate regularly.”
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