How the UK’s latest interest rate cut will impact your mortgage and retirement

The Bank of England’s latest rate cut is likely to bring a sense of cautious relief to borrowers, particularly those approaching the end of fixed-rate mortgage deals taken out during the peak of the rate-hiking cycle.

This is the view of Thomas Lambert (Financial Planner at Quilter), who notes that with the Bank Rate now at 4.00%, lenders may start to reflect the lower cost of funding in new deals, but changes are unlikely to be immediate or uniform across the market.

“For those on variable or tracker mortgages, some changes may come through more quickly. That said, average mortgage rates remain significantly higher than the ultra-low levels borrowers became accustomed to during the 2010s,” he said.

“Even with this latest reduction, the cost of borrowing is still meaningfully above pre-2022 norms, and the affordability challenge remains acute for first-time buyers and those looking to move up the housing ladder.”

Lambert notes that markets currently expect the Bank to cut rates once more this year, potentially taking the base rate to 3.75% by year-end.

But progress is likely to be slow and data-dependent, meaning those making major borrowing decisions should continue to plan based on a more elevated interest rate environment, he said.

Retirement and pensions

For retirees considering their income options, today’s rate cut could mark a turning point, said Lambert.

“Annuity rates, which have been particularly attractive in recent months thanks to high gilt yields, may start to decline,” he said.

“Anyone weighing up whether to convert part of their pension pot into a guaranteed income should take advice and consider acting sooner rather than later. While rates may not drop off a cliff, the window to secure particularly favourable terms could begin to narrow if this cycle of easing continues.”

For those in drawdown, the relative appeal of annuities versus staying invested may also shift, said Lambert.

“With lower interest rates potentially providing a tailwind to equity markets, there may be renewed value in keeping options open but only with a clear plan that balances income needs and risk tolerance.”

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