Interest rates can directly influence your borrowing costs and savings growth, and can even affect your investment returns.
The Bank of England (BoE) sets the base rate, partly as a means of controlling inflation, and high street banks and lenders typically adapt to it.
After reaching 11.1% in October 2022, inflation returned to the target level of 2% in May 2024, though it has since risen to 2.2% according to the most recent figures from the Office for National Statistics (ONS).
As inflation has fallen to more manageable levels, the BoE decided to lower the base rate in August, from its 15-year high of 5.25% to 5%, marking the first cut since before the pandemic.
Although the reduction has so far been small, there could be further cuts to come, though analysts have suggested that the BoE will proceed with caution.
Read on to discover three ways falling interest rates could affect your wealth.
1. Interest returns on your savings may fall
Falling rates are usually unfavourable for savers, as they typically result in reduced interest on savings accounts.
In the past couple of years, some savings accounts have offered the highest interest rates in over a decade, with some even surpassing inflation in the last few months. You might have seen the purchasing power of cash savings increase as inflation fell and interest remained high.
Conversely, when interest rates drop, the growth of your savings slows, and if the rate falls below inflation, your money could lose purchasing power over time. This is a more common situation, and cash generally has a poorer chance of “beating” inflation and retaining its real value than other assets.
However, cash can be useful for storing money that you may need on short notice, such as for an emergency fund.
So, if you want to continue saving, it could be worth exploring options like fixed-rate accounts that might offer more stable returns.
2. The cost of borrowing could come down
Falling interest rates could mean the cost of borrowing comes down.
Mortgages, business loans, or any other type of borrowing can be expensive when interest rates are high. Generally, the higher the interest rate, the larger your monthly repayments will be.
So, as interest rates decrease, you may see your mortgage and loan repayments drop as well, assuming your interest rate is variable.
For instance, if you have a tracker- or variable-rate mortgage, your monthly repayments should fall once your lender drops their interest rate, in line with changes to the base rate.
If you have a fixed-rate mortgage, your monthly repayments won’t be affected until the end of your current term.
When the cost of borrowing decreases, you might find yourself with more disposable income than before. This can be an opportune time to revisit your financial plan and work with a financial planner to optimally reallocate those extra funds.
3. You may notice higher returns on your investments and less market volatility
Although there isn’t a direct link between interest rates and stock market performance, you may notice less volatility and possibly even higher returns on your investments as interest rates fall.
This inverse relationship is due to borrowing becoming less expensive for businesses when interest is low, meaning they can reinvest profits and have a more reliable cash flow. This can increase company valuations, leading to a more stable stock market and greater returns for investors.
Moreover, lower interest typically means that consumers have more disposable income and are more likely to spend and invest their money, helping listed companies (and other investors) to thrive.
A financial planner can help ensure you are well-prepared for further drops in interest rates
A financial planner can help you adjust your plan in response to interest rate reductions, and they can work with you to ensure you are prepared for any further cuts.
This may involve reallocating your cash savings, increasing your investments, or securing a fixed-rate loan for your business. Additionally, they can support you in adapting your plan to better support your long-term objectives, such as building your retirement fund, as your short-term cash flow changes.
By understanding how your loan repayments, savings growth, and investment returns could be affected, a financial planner can provide tailored strategies to help you capitalise on the opportunities presented by lower interest.
To speak to a financial planner, get in touch.
Email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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