This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your financial adviser here at InvestAcc Wealth Management in Cumbria, Teesside and across the North of England.
March 2020 might feel like a long time ago here in May 2020, but the decisions taken by the UK authorities are still having far-reaching effects on the economy and household finances. One notable development was the Bank of England’s (BoE) decision to lower its base rate – twice. Within the space of a week, the 0.75% rate was cut to 0.25% and then to 0.10% where it still currently stands.
In this article, our financial advisers at InvestAcc share some of the financial repercussions of this decision by the BoE. We also explore whether the base rate might change against soon, and outline some of the financial planning implications for clients here in Cumbria, Teesside and across the North of England.
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For those already with a mortgage, the lowered base rate in March might have been welcomed. After all, for those on a tracker mortgage or a variable rate mortgage this likely meant lower monthly payments. For those with a higher-value mortgage, the monthly savings could amount to hundreds of pounds.
However, the 0.10% base rate is not completely good news. Those on a fixed-rate mortgage, for instance, could not benefit from lower monthly repayments due to their locked interest rate. For savers, moreover, the reduced rate has probably eroded the interest rates on the Cash ISAs and regular savings accounts (which have already been meagre for many years).
In ‘normal times’, a lower base rate might also be a good time to consider remortgaging to see if you could get a better deal, with a lower interest rate. At present, of course, the UK housing market is still emerging from a near-standstill since March 2020 in the wake of the Covid-19 outbreak and lockdown. Halifax, for instance, pulled the majority of its mortgages off the market at the end of March, whilst mortgage products across the market diminished by 30%. Many demanded a minimum deposit of 25%, effectively barring many first-time buyers who tend to have less equity available.
Many questions might spring to mind at this point. Here at InvestAcc, our financial advisers have been asked whether the base rate might change again, and what this means for a client’s financial plan. Another common question is where the 0.10% base rate should alter one’s balance of investments at all. In particular, should you now move more cash investments into assets with higher potential to generate returns, such as equities?
These are complex questions and, naturally, many of the answers will play out differently on a case-by-case basis, depending on factors such as your financial goals, situation and attitude to investment risk (to name a few). It’s important to state the nobody knows when the BoE might alter the base rate. Remember that many people speculate a base rate rise in 2015 which then never transpired, due to inflation unexpectedly entering negative territory.
Bear in mind that the reduction in March was originally announced as a temporary, emergency measure to stabilise the economy in the wake of Covid-19. That suggests that it might rise again later this year, but any predictions need to be taken with a grain of salt.
Given that the base rate cannot go down much further than the current 0.10% without turning negative, it might be worth seriously considering whether to fix your mortgage (if you are on a tracker/variable rate). This decision, of course, will depend on your distinct financial needs and goals, so consider getting professional advice before making any big decisions. The property market in the UK is still emerging from a near-standstill, where social distancing measures and self-isolation made it difficult to perform property inspection and valuations. However, things appear to be improving, due to recent lifting of lockdown restrictions aimed at getting the housing market moving again.
From an investment perspective, cash has long generated weak returns for investors due to the poor interest rates on regular savings accounts. Indeed, most of these have barely beaten the rate of inflation over the last 10+ years. As such, any lower interest rates resulting from the 0.10% base rate should simply serve as a further nudge for investors to consult a financial adviser about how to incorporate cash investments more effectively within a strategic, well-diversified portfolio.
There is still much uncertainty in the economy and markets in May 2020. In times like these, there are many aspects of our finances which need examining and which could benefit from the experience of a professional, independent financial adviser.
If you are interested in discussing your financial plan, please get in touch with your financial adviser at InvestAcc Wealth Management in Cumbria, Teesside and across the North of England. Reach us via:
t: 01228 538 988
May 8th, 2020