Interest rates reduced to 4.5%: the potential impact on your finances revealed 

The Bank of England (BoE) has cut interest rates from 4.75% to 4.5% today, Thursday 6 February. 

Seven members of the BoE's Monetary Policy Committee voted for a 0.25 percentage point cut to bring it to 4.5%, while two members voted to reduce it further by 0.5 percentage points to 4.25%. 

This is significant and suggests the BoE may be open to more base rate cuts in the future (or bigger reductions). 

One of the biggest reasons behind the interest rate reduction is the stagnating UK economy as the fallout from the Autumn Budget continues. 

While inflation dipped from 2.6% to 2.5% in December, this is not enough to deter the BoE from reducing the base rate, as high wage growth and upcoming employer national insurance contributions could fuel inflation.  

There is also uncertainty about the potential impact of new US president Donald Trump’s policies on the UK. 

How will mortgage rates be affected? 

Variable-rate mortgage holders will likely benefit as a lower base rate tends to lead to their rate falling, so their monthly repayments may be lower. 

The average five-year fixed-rate mortgage rate is currently 4.77%, according to Rightmove. 

Fixed mortgage rates have been fluctuating amid a recent rise in swap rates but may not be significantly affected as the BoE’s decision has been priced in by the financial markets, with some lenders already cutting rates earlier this week.  

However, it’s worth stressing that mortgage rates may continue to fluctuate, and the positive sentiment from the Monetary Policy Committee could have an impact. 

If you’re hoping to get on the property ladder, it’s now more expensive than ever before, and prices are likely to rise this year. Demand has recently risen due to the upcoming changes in stamp duty in 2025. 

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

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? 

Savings rates have remained resilient throughout the last year, only dipping after two base rate reductions in 2024. 

However, any fall in the base rate can prompt savings providers to cut rates, which is why it’s worth opening an account, particularly if you’re interested in a fixed-rate one, as rates are around 5%. 

You may want to consider investing if you’re seeking even higher rates, have long-term financial goals, and don’t need easy access to your cash – but this comes with extra risk. 

While your investments can rise and fall in value, you may be able to ride out any possible 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, as well as advise on how to reduce your tax bill legally. 

What about annuities? 

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

Annuity rates have increased throughout 2024 and at the start of this year, with the latter linked to gilt yields surging to their highest level since 2008. 

Changes in the base rate also have an impact on annuity rates, so the BoE’s decision could cause providers to reduce annuity rates.  

While annuity rates have held up, this cannot be guaranteed following the latest reduction, so it’s worth considering an annuity now. 

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