A few month ago, I mentioned that mortgage rates could go lower and it looks like they now will as the Bank of England have today cut interest rates to a record low of just 0.25%. Whilst this is great news for borrowers or people in debt, it is terrible news for savers. If you have £1000 in the bank earning 0.25%, you get a measly £2.5 in interest a year. The Bank of England, by cutting the interest rate, have continued their war on savings as they would like people like you and I to go out there and spend our cash instead of save it.
So what are the consequences of an interest rate cut?
Ultra-low interest rates have a powerful effect – they are ultimately the fuel for much higher asset prices.
You see, after the massive fall in interest rates over the last few years, investors have given up on betting on higher interest rates. Instead, they are fearful. So they are buying government bonds for safety. That pushes interest rates down. But investors are sick and tired of earning next to nothing on their money.
Ultimately, these record-low interest rates will drive a mass exodus of investors OUT of bonds that earn near-zero percent and into… well… just about anything else.
Because of today’s cut and new record-low interest rates, house prices should continue to rise, stock prices should keep going up, and commodity prices have started rising this year as well.
How you can benefit from an Interest rate cut?
In a low interest rate environment, the best thing to do is to buy assets. The three asset classed that are expected to do well are are stocks, housing, and gold.
The safest idea that should deliver a decent return is a house… either your primary residence or an easy-to-rent property.
Even though house prices are at record levels, they still have the ability to go higher. Mortgage rates are near record lows. And the supply of new homes is low – there are enough to last a little more than four months at current sales levels. So the fundamental case for higher home prices is extremely solid. There’s plenty of upside.
Beyond these housing-specific numbers, the bigger issue is this: Your mattress pays no interest.
You can’t retire on next-to-zero-percent interest. You need to do something else with your money to live off it in retirement.
People approaching retirement are increasingly turning rental properties in order to earn rent… or they need to buy dividend-paying stocks. The lightbulb is starting to go on in people’s heads. People are putting money to work in the stock market and the real estate market, whether it’s the right thing for them or not.