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Category: General

What to do When Interest Rates Fall

When interest rates rise, people may worry that their loans will get more expensive and maybe even panic. However, when the rates fall people tend to do very little. It is worth though, reacting in a similar way that you would when rates go up as you need to take advantages of any changes that are taking place.

Compare loans and consider switching

If you have a loan then you may find that when the Bank of England base rate falls it will not necessarily mean that your rate goes down. If you are in a fixed rate then this will not happen, but even if you have a variable rate, unless it is a tracker, then the rate may not necessarily go down. Some lenders do not always choose to follow the changes in base rate or they may be slow to follow it. This is because they make more money if they keep the rate higher and if other lenders do not put their rates down, they will not need to copy as they will still be competitive. However, it could be that some lenders reduce their rates and others do not. It is therefore a good idea to do some research and see whether you can switch to a lender which has a lower rate and therefore save money.

Before you switch you do need to be careful though. You need to check whether there will be any costs. It may be that you will have to pay a fee to leave your current lender and you may also have to pay a fee to join a new one. Check this and then calculate whether it is still worth switching to them or not. You could find that you will be able to save quite a bit of money. If you are in a fixed rate deal it may be more difficult for you to switch as you are often tied in to that lender.

Pay off extra

When interest rates fall, if you are on a variable interest rate, it means that you will normally be paying less back. This could be a significant chunk of money that you are saving or it could be a small amount, depending on how high the interest rate is and how much money you are paying interest on. In both cases you will be spending less. This can therefore be a good opportunity to repay a bit extra on your loan.

Before you do this, you need to check whether there is any penalty for repaying the loan early. Some will have a fee that you have to pay in order to repay early which is called an early redemption fee. This could be equivalent to a month’s interest or it could be a significantly larger amount. It is well worth checking to see. There may not be a fee at all, but you may find that you will have to pay quite a bit. The easiest way to find out is by contacting customer services and asking. Then you will be able to calculate whether you think it is worth overpaying. If it is too expensive, then it can be wise to use the money that you save to repay other loans or to put into a savings account to use in an emergency.

Save some money

It is a good idea saving money at any time. When interest rates are low or if they are falling then you may not feel that it is so worthwhile. This is because the interest that you get on your savings is very low. It can feel that you are not getting much of a return for your money. In fact, you may feel that you will be better off spending it because the interest rate is so low and possibly even lower than inflation. In theory, it is therefore better to spend the money as otherwise it will lose value. However, having some money to fall back on can be far better than having to borrow money in the future and you will save money if you do not have to do this.

You may also be able to find some decent savings rates if you search for them. If you are prepared to tie up your money, perhaps in a notice account of a bond, then this could help you get more interest. However, if you are saving for an emergency then you may be looking for an instant access account. Compare different accounts though and you could find one that offers a decent rate that you feel is worth taking.

So, it can be tempting not to do anything hen interest rates fall apart form being glad that they did not rise and hoping you will benefit. However, it is wise to actually do a few things to make sure that you really can take advantage in the rate reduction.