What do falling interest rates mean for you?

The Bank of England (BoE) has cut interest rates six times since August 2024, bringing the cost of borrowing down for both businesses and individuals.

In their most recent meeting on 18 December, the central bank’s Monetary Policy Committee (MPC) voted 5-4 to cut the base rate by 25 basis points, bringing it to 3.75%.

Whether the base rate will continue falling in 2026 is yet to be seen, but consumers are already feeling the impact of lower rates on their own finances.

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Whether that be in lower interest rates on their savings accounts, or slightly lower mortgage payments, the decisions made by the MPC have an impact on your personal finances.

What is the bank rate and why is it important?

When we talk about the BoE lowering interest rates, this refers to what is called the ‘bank rate’, or the ‘base rate’.

The bank rate is the core interest rate in the UK, and is the rate of interest the BoE pays to commercial banks, building societies, and financial institutions that hold money with the central bank.

The bank rate is also the interest rate that the central bank charges on loans made to other financial institutions, therefore affecting their own lending and savings rates.

This second point is the most important one for individuals, as the knock-on effect of the BoE lowering or raising the bank rate is that you will pay more or less on loans you take out, or earn more or less interest from your savings.

The reason that the BoE moves interest rates is typically to achieve certain economic goals for the country. The most important of these, but not the only one, is achieving the bank’s target inflation rate of 2%.

Broadly speaking, when inflation is too high, interest rates will be raised in order to rein in consumer spending and push down demand.

For example, this may mean your mortgage payments increase and you therefore have less money to spend elsewhere. Meanwhile, people are also encouraged to save more money and make the most of higher interest rates.

On the other hand, interest rates may be lowered in order to try to stimulate the economy and encourage people to spend more – mortgage payments will be lower and savings rates will be far less appealing.

This may be done when inflation is below target, but could also be done to bring the base rate back down to a neutral level.

What do falling interest rates mean for mortgages?

A drop in the bank rate generally translates into cheaper mortgages as financial institutions are able to borrow money for less, and are therefore able to lend money to consumers for cheaper too.

Of course, whether or not you will be able to feel the effect of lower interest rates will depend on the type of mortgage deal that you agreed to.

Those who choose a standard variable rate mortgage will most likely see their mortgage rate go up or down when the Bank of England moves rates, though not necessarily by the same amount as the base rate as banks tend to predict where rates will go before the MPC meets and raise or lower rates in anticipation of this.

As the name suggests, a tracker rate mortgage tracks the BoE’s base rate, plus a few percentage points. That means that movements in how much you pay are directly linked to decisions made by the MPC – if they decide to cut rates by 25 basis points, your mortgage rate will fall by the same amount.

Finally, those who are locked in on a fixed rate mortgage will not see any difference in their interest rate until they reach the end of their term and negotiate another fix. Fixed rate mortgage rates also tend to follow the BoE’s lead with rate cuts.

What do falling interest rates mean for savings?

When the Bank of England cuts interest rates, savings rates also often fall, making putting money away into a savings account less attractive.

If the bank rate is high – like it was for much of 2023 and 2024 – savers tend to enjoy very good interest rates on their savings.

For example, in October 2023, the bank rate was 5.25% after being hiked through 2022 and 2023. With a higher base rate, savings rates also increased, with the average one year fixed rate ISA paying an interest rate of 5.48%, according to analysis by Finder.

But the opposite is also true. When the bank rate is cut, the top savings deals disappear from the market.

As of 2 January, as the BoE has eased interest rates since the summer of 2024, the average one year fixed rate savings account pays just 3.84% interest, according to figures from Moneyfacts.

With more paltry interest rates, consumers have a more difficult time finding inflation-beating savings accounts. This is particularly difficult when the BoE cuts the bank rate when inflation is high.

Sarah Coles, head of personal finance at Hargreaves Lansdown, says that when interest rates are falling, it is important you make sure your money is working hard for you in a high interest account.

She said: “If you have savings, keep an eye on the rate you’re earning. The high street banks haven’t been slow to cut rates, and some are offering just 1% right now. More competitive accounts have held up far more robustly, but some of them will be on the move too. If your bank cuts your savings rate, don’t just resign yourself to it. Not all banks are equal and there are still easy access rates well over 4% on offer.”

See our guide to the best easy-access rates, one-year savings accounts, regular saver accounts and cash ISAs for the latest deals on cash savings.

Those who are wanting to save for the long term could also consider starting to invest some of their savings.

While the value of investments can go up as well as down, a well-balanced portfolio often provides higher returns than you would get by just leaving your money in a savings account. We take a closer look in our guide on saving versus investing.

What do falling interest rates mean for annuities?

Annuities are a way of turning your pension pot into a guaranteed income for life. You buy an annuity by using some or all of your pension savings.

How much income you get in exchange for your pot depends on annuity rates. These are linked to UK government bond yields, which are in turn linked to the Bank of England base rate. A cut in interest rates generally translates into a fall in annuity rates.

As interest rates rose from 2022, the annuity market experienced a period of unprecedented strength. 2025 was a strong year for the annuity market, with incomes hovering close to all-time highs.

The latest data from Hargreaves Lansdown shows that a 65-year-old with a £100,000 pension can get up to £7,667 per year from a single life level annuity with a five-year guarantee.

But as interest rates fall, so will annuity rates, removing them from the highs they experienced in a rising interest rate economy.

This being said, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said that despite December’s rate cut, “annuities remain good value, and we can expect to see interest continue from people in search of a guaranteed income”.