Falling interest rates – where should you invest?

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

The Bank of England finally cut interest rates on 1 August 2024 after 12 months of holding the base rate steady at 5.25%. The new headline rate is 5%. Indeed, markets are widely expecting a further reduction later in the year—possibly in November.

This opens up many questions, especially for investors. Should you change your portfolio strategy in light of interest rate movements in the UK? What are the implications for an individual’s wider finances, such as savings and mortgages?

Below, our Lincoln financial advisers offer some reflections on this key topic. We hope these insights are useful. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:

01476 855 585
info@casfin.co.uk

Optimise your savings

It is important to stress that nobody knows what will happen to UK interest rates. Few could have anticipated the inflation surge between late 2021 and 2023, which prompted the Bank of England (BoE) to raise interest rates 14 times. Market forecasts and expectations have their place. However, they cannot be relied upon to predict what will happen in 2024.

Right now, it may be worth examining your savings to ensure you are getting the best interest rates. You are not required to remain with your existing bank. There may be better products elsewhere on the market. Some accounts still offer 5% or more in September 2024.

Consider how much money you can “lock away” in a fixed-rate account. Emergency savings, for instance, will probably be best placed in an easy-access account. Many banks are pricing market expectations of further cuts into their savings products. However, the uncertainty about further BoE cuts could mean that some deals could be pulled if a cut does transpire.

Consider your goals

What do you need your investments to “do”? If you are investing for retirement in 20 or 30 years, a change in UK interest rates may not be hugely significant (unless your risk tolerance or other variables have also changed). For a long-term goal such as this, risk tolerance is the most crucial factor. Generally, a more “cautious” or “risk-averse” investor may lean their asset allocation towards bonds. However, an investor more “aggressive” or “risk-taking” will likely prefer to weigh their portfolio towards equities, even if interest rates are historically high.

Interest rates come into sharper focus when you are nearing your financial goals. For instance, perhaps your planned retirement date is 5-10 years away. This is often a natural point for an investor to consider “de-risking” their portfolio (e.g. rebalancing more towards bonds instead of equities, which are usually more volatile). If interest rates are falling, this can throw up some difficult questions – e.g. if you transition towards bonds (or other investments heavily influenced by interest rates), can you continue to grow your portfolio satisfactorily whilst de-risking?

Here, you should consider getting help from a financial adviser. Different people will have various priorities, goals and attitudes to risk, which will influence decisions. A crucial discussion will be balancing risk – i.e. what is the “opportunity cost risk” (of missing out on potential returns available elsewhere) versus the risk of a market crash? If equity markets continue to grow throughout your investment horizon, your returns may not be as strong if you move your portfolio heavily towards bonds (especially if interest rates keep falling). Conversely, will your portfolio have sufficient time to recover if an equity market crash occurs?

What about property?

Property is one of the most popular asset classes in the UK. Some investors are attracted to buy to let, gaining a steady income stream from tenants. Others lean towards a speculative approach (buying property to sell it later for a profit). If UK interest rates are falling, could this provide buoyancy to valuations?

Theory suggests that falling interest rates reduce the cost of borrowing. As such, mortgages (including buy to let) become more affordable and appealing. However, this potential benefit could be offset by other variables. For instance, if there is a contraction in demand (e.g. due to falling immigration rates) or an expansion in supply (due to accelerated house building), property valuations could conceivably fall even if interest rates go down.

As financial advisers here in Lincoln, we regularly urge clients to remember the importance of diversification. Be careful about putting all of your investment eggs in one basket. The drawback of property investing is that significant capital sums are typically required (e.g. for a buy to let down payment), which can tie up a disproportionate amount of an individual’s wealth. If the property investment goes wrong – e.g., due to a decline in the surrounding area’s quality – the investor could face financial troubles. Property also suffers from a lack of liquidity. It can be difficult to buy and sell, taking considerable time (and costs) for these transactions to complete.

With this said, a fall in interest rates could present opportunities for property investors to restructure and strengthen their portfolios – e.g. by remortgaging onto lower rates (allowing more profit to be generated once expenses are subtracted from rents). Homeowners might also consider their own mortgage with a professional. For instance, if you are currently on a standard variable rate, should you continue on this path? If not, should you fix now or wait until market expectations of a further BoE cut transpire?

Invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk