The Bank of England has decided to maintain interest rates at 0.1%. It’s a decision that was widely expected as the UK economy continues to recover from the effects of the coronavirus pandemic. This marks a whole year of interest rates remaining at their record low of 0.1%.
But what does this low interest rate mean for your finances? Let’s take a look.
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What are interest rates?
Interest is the cost of borrowing money, typically expressed as an annual percentage of the amount borrowed.
If you save money with a bank, the interest rate is the rate the bank will pay you for allowing them to use your money. If you borrow from the bank, it’s the rate the bank will charge you for borrowing.
The bank rate, also called the base rate, is the most important interest rate in the UK. It is set by the Bank of England and is the rate the bank charges other banks and lenders when they borrow money.
If the BoE changes the interest rate, then banks and other lenders usually change their interest rates on customers’ savings and borrowing.
Why are interest rates so low?
During an economic crisis, such as the one caused by the pandemic, people tend to reduce their spending. If spending is reduced too much, it also reduces business and can cause workers to lose their jobs.
To prevent this and to encourage spending, the BoE may cut interest rates. Cutting interest rates makes it cheaper to borrow and less rewarding to save. This encourages spending and investment.
That is what has happened in the last 12 months. Amid the Covid crisis, the BoE has had to cut interest rates and keep them low to support spending and jobs.
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What do low interest rates mean for my money?
In broad terms, low interest rates are good news for borrowers.
A low base rate will likely lead to banks and other lenders reducing the interest rates they charge for loans, mortgages and other types of credit they offer.
Essentially, it might become easier to get a loan or a mortgage. It might also affect your repayments. If you have a variable mortgage, for example, your repayments might reduce. However, if you are on a fixed rate mortgage, you won’t feel the effects until your fixed term ends and you’re moved to a standard variable rate.
A lower base rate is bad news for savers. It means lower interest on your savings. So, if you have a savings account with a bank, your savings pot will grow a lot more slowly.
What is a good investment alternative when interest rates are low?
With interest rates being historically low, it’s a difficult time for savers to get good returns from their savings. Luckily, there are other ways to make sure that your money is working as hard as possible for you.
For example, if you’re happy to take on a little risk, consider investing in stocks. Though past performance is not a reliable indicator of future results, the stock market has a strong track record of helping investors build wealth.
One of the simplest ways to invest in the stock market is through a stocks and shares ISA.
The main advantage of a stocks and shares ISA is that it has a tax-free wrapper that shields your gains from tax. So, you get to keep more of your profits. Tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
If you decide to take the plunge, don’t forget to do your research. And if you’re unsure of your investment options, consider seeking independent financial advice first.
