Rate cut leaves savers facing 'lost decade'

While homeowners may see their costs get even cheaper, the decision to chop the base rate means savers are facing a "lost decade" of returns on their cash, experts have said.

Estate agents warned that while the housing market could get a fresh injection of confidence from the base rate cut, aspiring first-time buyers face saving harder, for longer, as the returns on their savings pots diminish.

Mark Hayward, managing director of the National Association of Estate Agents (NAEA) said the interest rate cut to 0.25% will be "welcome news for many current home owners".

He said that cutting interest rates further is likely to improve the confidence of potential buyers who may have put their house hunting on hold following the Brexit vote in June.

Some recent housing market reports had shown sharp falls in activity, with many commentators suggesting the referendum result had made some buyers take a pause for thought.

But Mr Hayward said the rate cut "represents a body blow for savers and those hoping to get their first foot on the property ladder".

He said: "For those saving to pay a deposit on a future home, the interest rate cut will be frustrating...

"The outcome of the today's rate cut is simple - we will see aspiring homeowners saving harder for longer, which will no doubt have an impact on the number of first-time buyers succeeding in their dream of acquiring their own home."

Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: "The nightmare for savers continues, and they now face a lost decade of returns on their cash.

"If anything things are getting worse, not just because savings rates will fall, but because inflation is forecast to rise, eroding the buying power of cash in the bank."

Paul Smee, director general of the Council of Mortgage Lenders (CML), said that since the last change in official rate in March 2009, the average mortgage rate has fallen from 3.8% to 2.9%.

He said: "This confirms that Bank rate is not the only influence on mortgage pricing; we feel that the mortgage market is at present well capitalised, resilient and open for business. Housing market fundamentals are sound."

The extent to which existing home owners with a mortgage can now expect to see a change in their repayments depends on whether their deal directly tracks the base rate.

Around half of borrowers are currently on fixed rates and will see no immediate impact.

Of the remaining home owners on a variable rate mortgage, more than 1.5 million have a tracker rate. The CML said while borrowers may automatically see a rate reduction, depending on their contract, some deals have a "collar" or a lower floor below which rates cannot fall.

Jane Tully, director of external affairs at the Money Advice Trust, the charity that runs National Debtline, also warned households should not feel a "false sense of security" from the rate cut.

She said forecasts "point to choppy waters ahead for the UK economy, and the impact that this could have on many households' budgets will far outweigh the impact of today's rate cut".

This year so far, there have been 1,128 savings rate cuts across the market and just 127 rate increases, according to Moneyfacts.co.uk.

Charlotte Nelson, a spokeswoman for Moneyfacts, said: "Rates have tumbled since the last base rate change; for example, the average easy access account has fallen from 0.94% in March 2009 to 0.55% today, while the average two-year fixed rate bond fell from 2.83% to 1.31% over the same period.

"The base rate cut does not necessarily mean that providers will pass on the reduction to savers, but seeing as rates are already dropping, this latest change will give them yet another opportunity to cut their rates."

Many pensioners who rely heavily on the returns they get from their savings to generate an income, will be particularly hard hit by any further falls to savings rates.

Richard Eagling, head of pensions at Moneyfacts, said the move is likely to add extra downward pressure on annuity rates, which are already at record lows.

People approaching retirement may want to use their pension pot to buy an annuity, which gives them a fixed retirement income.

Mr Eagling expected the cut to the interest rates will also have an adverse impact on the "already precarious" funding position of defined benefit pension schemes, such as final salary pensions.

He warned: "Employers will need to look at ways of addressing the greater pension deficits that this is likely to create."