The Bank of England has just announced a change to interest rates. The financial press will spend thousands of words on what this means for the economy. Most of it will not affect you. Here is what actually matters — and what to do about it.
The Bank of England base rate is the interest rate at which the Bank lends money to commercial banks. It is the foundation on which almost all other interest rates in the UK economy are built. When the base rate rises, borrowing becomes more expensive and saving becomes more rewarding. When it falls, the reverse is true.
If you are on a variable rate or tracker mortgage, your monthly payments will move almost immediately in line with the base rate change. A 0.25 percent cut on a £200,000 mortgage saves approximately £40 per month. A rise costs approximately the same.
If you are on a fixed rate mortgage, the change does not affect your current payments at all. But it affects what rate you will be able to fix at when your current deal expires. If rates have fallen, it may be worth considering whether to remortgage early — factor in any early repayment charges before making this decision.
Savings rates broadly follow the base rate — but with a lag and with significant variation between providers. High street banks are notorious for passing on rate rises slowly and rate cuts quickly. When the base rate moves, check your savings account rate and compare it to the market. Easy-access accounts from challenger banks — Chase, Marcus, Monzo — typically respond faster to rate changes and pay more competitively.
Rate changes affect bond prices (inversely — when rates rise, existing bond prices fall), equity valuations, and property values. For long-term investors, rate decisions are largely noise. The correct response to a rate change for a long-term index fund investor is usually: nothing. Stay invested. Continue your regular contributions. The strategy does not change.
Rate decisions matter. But for long-term investors, they rarely require action. Review your mortgage rate if you are approaching the end of a fixed deal. Optimise your cash savings rate. Do not sell your index funds. Continue investing as planned.
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