Interest rates cut to 5%: the potential impact on mortgage and savings rates

The Bank of England (BoE) has cut interest rates from 5.25% to 5% today, Thursday 1 August. 

Five members of the BoE's Monetary Policy Committee voted for a 0.25 percentage point cut to 5%, while four members voted to keep the base rate unchanged. 

In June, UK inflation remained at 2%, slightly higher than experts’ predictions of 1.9%, due to higher prices in restaurants and hotels, which may have been linked to Taylor Swift’s popular Era tour.  

In the US, inflation appears to be falling, with the lowest price inflation recorded in a year (at 3%) in June. This is positive as this may have impacted the BoE’s decision.  

There could be further reductions to the base rate over the next year. 

How will mortgage rates be affected? 

Variable-rate mortgage holders will be relieved as a lower base rate usually leads to their rate falling, making their monthly repayments lower. 

The average five-year fixed-rate mortgage rate is currently 4.88%, according to Rightmove. 

Recently, fixed-rate mortgage rates dipped below 4% for the first time since February, and rates may fall further depending on many factors, such as inflation and swap rates. 

Before the announcement by the BoE today, lenders have been cutting mortgage rates. 

If you’re looking to get on the property ladder, it’s now more expensive to buy a home and prices are expected to rise this year if mortgage rates continue to ease. 

If you’re applying for a mortgage soon, make sure you can afford it, have a good credit score, and clear your debt beforehand. 

A mortgage broker can boost your chances of a successful mortgage application. Click below to find a regulated broker via Unbiased. 

How will savings rates be affected? 

Savers seeking the best rates may see them fall following the base rate cut. 

Savings rates peaked around the end of 2023 and have been easing since, but the base rate reduction could spark further – and quicker - falls. 

So, it’s a good idea to open a fixed-rate savings account while rates are still generous at over 5%. 

If you’re looking for higher rates, you may want to consider investing, which can be an option if you have long-term financial goals and don’t need easy access to your cash.

While your investments can rise and fall in value, you may be able to ride out any potential volatility by investing for at least a few years. 

You can quickly match with a financial adviser via Unbiased, who can help you with an investment strategy or review your existing portfolio. 

What about annuities? 

Annuity rates have recently exceeded 7%, driven by several interest rate hikes, but this is now likely to change. 

Annuities offer a fixed income for your retirement or a fixed period to provide peace of mind. 

Experts have recently warned it’s a good time to secure an annuity as rates are high. 

Unbiased can match you with a qualified financial adviser who can help you find the best annuity for your circumstances.