How falling interest rates may affect your savings, investments, and borrowing in 2025

With the Bank of England’s (BoE) base rate predicted to fall further in 2025, it’s natural to wonder how this will affect your finances. Be it savings, investments, or borrowing, the base rate plays a crucial part in the performance of it all.

The base rate is set by the BoE’s Monetary Policy Committee (MPC) and is used as an interest charge on any money the BoE lends to other banks and lenders. For this reason, it affects the rates consumers receive from financial institutions on savings accounts as well as mortgages, loans, and other types of credit.

The MPC reviews the base rate eight times each year and it can rise or fall depending on how the MPC views the UK’s economic climate – namely as a way to control inflation.

According to the Office for National Statistics (ONS), inflation has been hovering around 2% – which is the BoE’s annual inflation target – since April 2024, with minor fluctuations. As a result, the MPC may lower the base rate in the coming months.

Here’s what falling interest rates could mean for your financial plan in 2025 and what you could do to stay ahead of the curve.

The base rate hit a low of 0.1% before rising to 5.25% to boost the economy

Since 2020, the BoE’s base rate has changed dramatically. In response to the economic impact of the Covid-19 pandemic, the BoE reduced the base rate to a record low of 0.1%. Lower interest rates typically encourage buyers to save less, and spend and borrow more, and this came at a time when the economy needed more consumer spending.

When inflation began to climb in 2021, the BoE started a series of hikes, bringing the base rate to a peak of 5.25% in August 2023.

The base rate remained there for close to 12 months before starting its steady decline. This was in an attempt to bring inflation back in line with the BoE’s 2% annual target, chosen to ensure the UK economy continues growing without making prices rise too quickly.

The base rate is now 4.75%, where it has stood since it was decreased in December 2024, and according to Morningstar, we could see it fall to 3.75% by the end of the year. However, some experts believe we’ll see just one cut, which may come in February.

Your savings might see a less competitive rate if interest rates fall

A falling base rate can affect interest rates across the economy, which in turn can have an effect on your savings.

When the base rate falls, banks typically lower the interest rates they offer on savings accounts. This means your money will not grow as swiftly, potentially eroding its purchasing power over time.

For example, Finder notes that the average instant access savings rate in the UK was 2.59% in December 2024. This only outpaces inflation by a small margin, with the ONS reporting an inflation rate of 2.5% for the same period. If the base rate falls, interest rates offered by lenders may very well drop too, meaning the interest you receive isn’t sufficient for your savings to keep pace with the rising cost of living.

As interest rates on traditional savings accounts decline, you may want to explore alternative options. High-yield savings accounts can offer higher interest rates than standard accounts but may have some restrictions. For example, you may face penalties for withdrawing your money early, and many require an initial deposit amount.

Alternatively, fixed-rate savings accounts offer a guaranteed interest rate for a set term, which can provide more stability during periods of falling rates.

These interest rates may be higher than instant access savings accounts, but you may also pay a fee here for withdrawing your money before the end of the fixed term. Additionally, interest rates could rise but you won’t be able to take advantage as you’ll be locked in.

Meanwhile, Cash ISAs can offer tax-efficient savings, which could boost your overall returns. In 2024/25, you can contribute up to £20,000 in a Cash ISA and you can split this allowance across multiple Cash ISAs, as long as your allowance hasn’t been used up by other types of ISA.

Keep in mind that your allowance cannot be carried forward if you don’t use the full amount.

Regularly reviewing your savings accounts and exploring alternative options could help you maximise your returns and ensure your money is working as hard as possible for you.

Your investment portfolio might be affected by fluctuating rates

Because stock markets react quickly to change, falling interest rates could have an effect on your investments. These can also vary depending on the type of investment you have, or the asset class you’ve chosen.

For stocks, falling interest rates can be positive. When the BoE lowers the base rate, borrowing costs for businesses and consumers decrease and can stimulate economic activity. This is because we’re less incentivised to save if accounts pay less in interest.

Consumers may spend more when interest rates are lower, perhaps on new homes or lifestyle changes. Meanwhile, businesses may feel they can finance new operations, acquisitions, and expansions, as costs could be cheaper. This could lead to more investment and businesses may see their earnings grow as a result.

All this could translate to higher stock prices – although of course, this is not guaranteed, and you could get back less than you invest.

For fixed-rate bonds, if interest rates fall, yields could rise. This is because interest rates and bond yields work inversely to each other. As a result, if the bank rate (and subsequent interest rates) is lower than your bond’s interest, you could be earning more interest than you could get elsewhere.

Borrowing costs may decrease in 2025

A fall in interest rates could significantly reduce borrowing costs, whether that’s for mortgages, personal loans, or business loans.

Mortgage lenders tend to price their products on the base rate, so a decrease could translate to lower rates. This can also make homeownership more affordable, stimulating the housing market. If you’re on a fixed rate, you won’t see an immediate change, but variable and tracker rates are likely to change with the base rate.

Essentially, when interest rates decrease, borrowing can become more affordable. Both individual consumers and businesses may be able to access cheaper loans for a variety of reasons, whether it’s for cars or other forms of consumer credit, or financing business expansion, investment, and hiring.

A Financial Planner can help you manage your finances this year

With the BoE expected to drop the base rate this year, even though it’s challenging to predict by how much, it’s important to consider how this could affect your savings, investments, and borrowing decisions.

While falling interest rates could mean lower returns on your savings, they could also present more opportunities for growth in your investment portfolio.

Our Financial Planners can help you develop a personalised strategy to make the most of your money in 2025 and beyond.

If you’re unsure how to approach the year ahead, talk to us today. We can help you build a plan that works for your unique needs and circumstances.

Get in touch with your existing planner, or if you’re not already a client, email us at enquiries@pen-life.co.uk or call 01904 661140.

Please note

All information is correct at the time of writing and is subject to change in the future.

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.