Investing & Performance | 22 July 2024
Lower interest rates: What’s the best way to plan your finances?
With base rate drops on the horizon, our experts talk through ways to plan your personal finances to help maximise the opportunities and minimise the risks.
Set by the UK’s central bank – the Bank of England – interest rates are a crucial component to economic policy, with significant implications for business and personal finances. This is because they help set the amount of interest you’ll receive on your savings or be paying on your borrowing.
Interest rates are expected to start coming down. So, preparing for such scenarios involves strategic financial planning to maximise the benefits and to mitigate any risks.
Here we explain some of the ways you could prepare financially for falling interest rates in the UK.
WHAT's been happening with interest rates up to now?
Historically, the UK's base rate, set by the Bank of England, has experienced significant fluctuations. For example, in 1979 the base rate reached double digits, peaking at 17%.
In the 1990s we saw a general decline, with rates stabilising around 5-6%. This continued into the early 2000s as the Bank of England maintained relatively low rates until the financial crisis of 2008, when they made an unprecedented cut down to 0.5% in 2009 to stimulate the economy.
More recently, in response to the covid pandemic, the base rate was further reduced to a historic low of 0.1% in March 2020, before rising slightly in subsequent years as the economy began to recover.
Now, as markets await the first interest cut in over four years, the big question is 'if there are cuts, how quickly will rates fall?'.
Interest rates and your savings
Duleep Vasudevan, Executive Director, Grow My Savings at Coutts explains how to plan for your savings if interest rates fall.
“With a falling Bank of England Base Rate, you could expect to see a reduction in the savings rates offered across the market. This is generally seen as bad news for cash savers, as the interest you earn would reduce.
“As your bank, in line with our terms, we will give you advance notice of this change and then update our rates in line with any Bank of England changes, so time is of the essence to secure the best rate.
“The good news is there are a number of ways you can plan ahead –
Secure a higher fixed term rate now
“If you have excess cash savings, and you are unlikely to need the money in the short or medium term, you could place it in a Fixed Term Deposit Account. This offers a fixed interest rate over the agreed term.
“Our Fixed Term account could offer you our highest rates of interest. But, keep in mind that fixing does not give you any flexibility – you cannot pay money in or out without breaking your term. Where you have a known timeframe though, this could be a good solution. We have both fixed term and notice accounts that could help you earn more interest on your money as you plan for the future.
“All our savings accounts offer something different, so it’s worth taking time to think about which ones could be right for you. If you're not sure when you'll need to withdraw your money, then splitting balances across different accounts could give you a mix of instant access with variable rates and higher fixed interest for money you don’t need right now.”
If your fixed savings is due to expire, or you’re looking for your next savings solution, let your Private Banker know.
Eligibility criteria: You need to be 18 years or over, and have a Coutts Current Account/Coutts Foreign Currency Current Account to have access to our savings accounts.
Interest rates, your mortgage and borrowing costs
Laura Siguine, Director, Private Banker, Middle East & Asia explains how falling interest rates could affect your borrowing costs.
“Although we’ve seen interest rates rise over the last two years, a lot of borrowers have been comfortable with this as the cost of the capital they receive is lower than the returns they’re able to get from the capital when they apply it elsewhere.
“With interest rates predicted to drop, that could present an even better potential opportunity to make good returns from a loan or mortgage.
“A fall in interest rates could also be a great time to review your borrowing position. For example, are the lending products you have in place still right for you – do they reflect your views on interest rates and do they give you an opportunity to reduce the cost of your borrowing?
Set a fixed rate for your mortgage over time
“Fixed rate mortgages offer budgetary certainty for a set period of time such as two or five years. However, if the Bank of England reduce the base rate, the interest rate you pay on your current fixed rate will not change.
“Pricing markets influence fixed rates. So, even though the Bank of England might move the base rate down, fixed rate mortgages might not necessarily also move down. These pricing or ‘swap’ markets read the predictions around future expectations of interest rates, often taking cues from the Bank of England’s Monetary Policy Committee Meetings and research.
Choose a tracker mortgage to follow the base rate
“The rate of our tracker mortgages moves along with the interest rate set by the Bank of England – marginally tracking it. Historically, our tracker rate has moved in line with the Bank of England base rate (though we reserve the right not to do so in future).
“We calculate debit interest daily, so clients benefit straight away from any reduction to our variable rates.”
Please speak to your Private Banker if you’d like to discuss your borrowing options.
Your home or property may be repossessed if you do not keep up repayments on your mortgage. Over-18s only. Terms and conditions apply.
Interest rates and your investments
Monique Wong, our Head of Multi-Asset Portfolio Management explains what interest rate cuts could mean for equity markets, bonds and your investments.
Bonds
“Bond prices have an inverse relationship with interest rates. This means that when interest rates fall, a bond’s value rises. This is because bond payments become more valuable in a lower interest rate environment. For bonds with long-dated terms, an anticipation of interest rate drops – or increases – can have a bigger influence as the market shifts to reflect future expectations.
“A typical balanced portfolio has around 2% UK government bonds, also known as ‘gilts’. Hence, the direct impact of Bank of England rate cuts on the portfolio would be positive but very modest.
“However, because other major central banks are tilted in a similar direction and also expected to cut interest rate, the aggregate impact on our fixed income holdings – which includes global government bonds and corporate bonds – would be meaningful and supportive. We’ve already seen the European Central Bank start to cut interest rates and the US Federal Reserve is expected to do so in the second half of the year.”
Equities
“The impact of lower interest rates on stock markets comes from company profitability and the lower cost of debt. However, the FTSE 100 is not highly sensitive to the UK economy because it is a multinational stock index – typically, over 70% of FTSE 100 company revenues come from outside the UK, according to the Global Exposure Guide 2023 by Morgan Stanley.
“Hence, similar to bonds, Bank of England interest rate cuts would have a modest positive influence on FTSE 100 stocks. The bigger impact for our portfolios will come from the support for global stocks as a result of global interest rate cuts.”
Conclusion
“While Bank of England interest rate cuts are expected to be positive for portfolio outcomes, the Bank is just one element of a global trend towards lower interest rates, following several years of higher interest rates brought in to fight inflation. This shift should be supportive of asset class returns, both bonds and equities.”
Advice and product fees may apply. The value of investments and the income from them can fall as well as rise, and you may not recover the amount of your original investment.
Interest rates and the residential property market
Katherine O’Shea, our Director, Real Estate Investment Service talks us through what interest rate cuts could mean for the UK property market and the value of your home.
“Property transaction volumes across the UK have been pretty sluggish over the last year and a half. Interest rates rose throughout 2023 as the Bank of England grappled to control inflation which made many property investors nervous. So far this year, the ongoing uncertainty in the mortgage market over the point at which we’re likely to see the first base rate cut has kept the brakes on transaction volumes.
“We have seen stronger activity in markets that are less reliant on debt and therefore less affected by changes to interest rates. For example, sales volumes in the super prime (£10 million+) market in London are still 21% above the 10-year average [source: Coutts/LonRes].
“The top end of the market continues to be driven by international buyers and we are listening to our clients carefully to see how potential changes to the UK non-domicile status could affect the property market. That said, London property continues to be regarded by international buyers as a ‘safe haven’ store of wealth and many non-domiciles with families in the UK will continue to view London as their home.
“The weakness in sterling, in conjunction with the fall in values since the property market peaked in 2014, means that dollar buyers in certain parts of the capital are managing to secure a 44% discount on 2014 prices.
“Looking forward, there are definitely some strong indicators that 2024 could be a better year than 2023 now that economic conditions have stabilised. We’ve seen increased demand from those that wanted to move in 2023 but held back due to rising inflation and rising interest rates. The general consensus from the high street agents is that price growth will be pretty flat this year but, over the next five years, prime central London in particular should outperform the rest of the market given price growth has been subdued over the last ten years.”
Interest rates and the commercial property market
Ross Ironside, Head of Commercial Real Estate at Coutts explains what lower rates might mean for commercial property owners and buyers.
“We may begin to see a rise in value in some sectors as sentiment improves following a rate cut. More commercial properties could be brought to market as it begins to operate more normally. That could represent opportunities for those looking to make an acquisition.
“A lower interest rate could represent the freeing up of cash from some assets – meaning opportunities to invest elsewhere. Lower rates could also provide the chance for those with higher debts to deleverage or reconstruct. A long-term hedging strategy for debt exposures is worth considering for those borrowing in the space, especially as the quick interest rate rises caught some people out in recent years.”
We're here to help
We’re here to chat through any questions you might have and to help work out what might be best for you, considering your deposits, lending and investment needs. For those looking to buy or invest in residential property, Coutts could help through our dedicated panel of leading buying agents. The story isn’t always simple but we have the expertise to help you navigate the options and find the best course for you and your family.
Security may be required. Product fees may apply. Subject to status.
Your home or property may be repossessed if you do not keep up repayments on your mortgage. Over-18s only. Terms and conditions apply.
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