How are my personal debts affected by the interest rates cut?

September 12, 2016

The Bank of England cut interest rates to 0.25% in August 2016, a move welcomed by many consumers. New borrowers may be able to obtain finance on a cheaper monthly basis, but what does this mean for you and your existing personal debts?

Secured borrowing – your mortgage
If you have a mortgage, you could benefit greatly from a reduction in interest rates. Your monthly repayments can be significantly lowered, offering more disposable income to pay off other debts.

Whether or not the interest rates cut affects your particular mortgage, however, depends on the type of loan you have taken out:

Fixed rate mortgage
Your repayments will remain the same if you have a fixed rate mortgage, as cuts in the interest rate have no effect. This is one of the risks you take when signing up for a fixed rate, but in certain circumstances you may still be able to take advantage.

Depending on when you took out the loan, the date when a financial penalty is applied for moving your mortgage away from the lender may already have passed, leaving you free to find a better deal.

Tracker rate mortgage
If you have a mortgage that tracks the Bank of England base rate, you could see a reduction in your monthly repayments as long as your lender is willing to pass on the savings they make.

As a rule of thumb, a potential saving of around £17 per month could be made on a 25-year mortgage of £100,000.

Unsecured borrowing
Unsecured borrowing is not secured on an asset such as your home or car. In general, it includes personal loans, credit cards, store cards, and payday loans, and because there is no security for the lender, interest rates tend to be higher.

Unfortunately, it’s unlikely that you’ll see any benefit from the interest rates cut on existing unsecured borrowing, but lenders and credit card providers may entice new customers using these ‘headline’ rates over the coming months.

In cutting interest rates, the Bank of England encourages consumer spending and reduces the incentive to save money. The greatest benefits will be experienced by those with a variable rate or tracker mortgage.

The opportunity to save is also there for certain fixed rate mortgage borrowers. If you can exit your deal without a penalty, you may be able to either take advantage of the lower interest payments using a variable rate mortgage, or fix your rates again at the lower rate.

An increase in disposable income following an interest rates cut generally means a rise in consumer spending. This lifts local economies and encourages the creation of jobs, so even if you don’t gain directly from the rate cuts, there is an indirect benefit that helps many people.

Scotland Debt Solutions provides professional debt advice to residents of Scotland. We aim to help you escape the debt trap, and provide support at any stage of financial difficulty. With five offices in Scotland, we can arrange a same-day meeting in complete confidence – call one of our experts to find out more.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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