Interest rates cut to 4%: how it could affect your money

The BoE has cut interest rates from 4.25% to 4% today, Thursday 7 August. 

Four members of the BoE's Monetary Policy Committee (MPC) voted for a 0.25 percentage point cut to bring it to 4%, while one member wanted a bigger reduction of 0.5%. The remaining members voted to keep it unchanged at 4.25%.

The markets were divided on whether the majority of the MPC would vote for a base rate reduction due to conflicting UK economic data.

The UK labour market has recently weakened, while inflation is still above the 2% target at 3.6% in June. Overseas factors, including US president Donald Trump’s trade tariffs and the recent tensions between Israel and Iran, continue to cause uncertainty.

Looking ahead to the end of 2025, the market expects another base rate reduction, bringing it down to 3.75%.

How will mortgage rates be affected? 

A lower base rate tends to lead to a lower interest rate for variable-rate mortgage holders, so your monthly repayments may be lower, while fixed rates may also be cut.

The average five-year fixed-rate mortgage rate is currently 4.5%, according to Rightmove. 

While fixed mortgage rates have been unpredictable over the last year, some of the cheapest deals are under 4%. However, these are usually for those with more equity in their home or a bigger deposit.

House prices in the UK have risen recently, but forecasts for the year have been cut from a 2% rise to a 1% increase by Zoopla. However, it’s still expensive to buy your own home as mortgage rates remain high compared to previous years.

If you’re considering applying for a mortgage, there are multiple boxes you need to tick, including making sure you can afford it, having a good credit score, and clearing outstanding debt. 

A qualified mortgage broker can boost your chances of a successful application. 

How will savings rates be affected? 

Despite dipping from a recent peak, savings rates remain generous, with up to a 5% rate available with a top savings account at the time of writing.

The BoE’s decision could impact savings rates in the future, so it’s worth locking in with a fixed-rate account now if you want peace of mind.

If you want to seek even higher rates, have long-term financial goals, and don’t need easy access to your cash, you should consider investing, although this comes with additional risk.

While your investments can rise and fall in value, you may want time to handle any possible volatility by investing for at least a few years. 

You can quickly match with a qualified financial adviser via Unbiased, who can help you with an investment strategy, review your existing portfolio, or advise on how to reduce your tax bill legally. 

What about annuities? 

Annuities provide peace of mind by offering a fixed income for your retirement or for a fixed period. 

Annuity rates recently exceeded 7.7%, marking the highest rate in a decade. However, changes in the base rate may affect annuity rates, so the BoE’s decision could cause providers to reduce them.

While annuity rates have continued to rise recently, 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.