As interest rates fall, is it time to invest?

As savings rates fall, Britons are rethinking where to put their money. After several years of unusually generous cash returns, the Bank of England’s recent cuts are starting to bite, leaving savers struggling to keep pace with inflation.

For Chancellor Rachel Reeves, who has pledged to spark an “investment revolution”, the timing could be significant. Lower rates are not only eroding the value of savings but may also encourage more people to consider the stock market as an alternative.

Yet the decision isn’t simple, especially for those planning for retirement. Is now really the right time to invest, or is cash still the safer option? Let’s look at what falling rates mean for savers, mortgage holders, and first-time investors.

A shift in saver behaviour

For decades, Britons have been cautious with their money, preferring the security of cash to the volatility of markets. Yet new data suggests that attitudes may be changing, mainly as hands are being forced.

In the first six months of 2025, one of the UK’s largest investment platforms saw more money moved from banks and building societies into stocks and shares ISAs than in the whole of 2024. Almost half of those transfers came from cash ISAs, up from just 30% the year before, a sign that savers are beginning to rethink their strategies.

Analysts describe this as a potential tipping point: lower savings rates are prompting would-be investors to consider whether they might achieve more by turning to the stock market, despite the yield risks.

Why falling rates matter

Just a year ago, some savings accounts were paying more than 5%. Those days are fading fast.

The Bank of England has cut the base rate five times since its peak of 5.25%, bringing it down to 4% in August. Market forecasts suggest there may be further reductions to around 3.25% over the next couple of years.

Unsurprisingly, the best deals are disappearing. The average easy-access account now pays 2.64%, according to Moneyfacts, well below inflation. Even shopping around may not deliver enough to preserve the real value of savings.

How the Bank of England’s Bank Rate affects you

The Bank of England’s official Bank Rate is currently 4% (as of August 2025), with the next review scheduled for 18 September 2025. This single figure influences the cost of borrowing and the return on savings across the UK economy.

When the Bank Rate changes, high street banks usually adjust their own interest rates on savings accounts and loans. But the link isn’t one-to-one. Banks still need to cover their costs and make a margin between what they pay savers and what they charge borrowers.

• When rates fall: Savings rates typically come down, though not always by the full amount. Borrowing, such as mortgages, tends to become cheaper, though again the reduction can be uneven.
• When rates rise: Savings rates often increase, but sometimes more slowly, while borrowing costs (especially mortgages and personal loans) usually rise more sharply.

Because banks cannot offer less than 0% on savings without discouraging deposits, cuts close to zero don’t always filter through fully. Conversely, when rates rise after being near zero, the increases in savings and borrowing rates are often smaller than the rise in the Bank Rate itself.

What this means for savers

Falling Bank Rate means the best savings deals are disappearing, making it harder to beat inflation by leaving money in cash. Savers may therefore start looking at other ways to grow their wealth, such as stocks and shares ISAs.

What this means for mortgage holders

Mortgage costs are directly tied to Bank Rate for those on tracker or variable products, and indirectly for fixed-rate borrowers (as lenders price in expectations of future rate moves). The recent series of cuts has eased pressure for some homeowners, though rates remain well above the ultra-low levels seen in the late 2010s.

The case for investing

History suggests that shares tend to outperform cash over the long term. Research from Barclays, spanning more than a century, shows equities beating cash returns 70% of the time over a two-year period, and 91% of the time over a decade.

Analysis by AJ Bell illustrates the difference in practical terms. Someone investing £1,000 annually into global equities since ISAs were introduced in 1999 would have seen their pot grow to more than £83,000 by the end of 2024. The same contributions left in a cash ISA would have produced about £34,000, nearly £50,000 less, and a loss in real terms once inflation is considered.

That said, investing carries risk. Markets can fall as well as rise, and unlike cash, investments are not guaranteed. For this reason, most financial planners suggest keeping at least three to six months of living costs in cash for emergencies, and only investing money that can be left untouched for at least five years. And lets not ignore the importance about paying off debts with high interest rates first.

Building confidence

For many, the biggest barrier to investing is simply knowing where to begin. Experts stress that you don’t need thousands to start. Regular, modest contributions can harness the power of compounding, and drip-feeding into the market can smooth out the ups and downs of share prices.

Beginners who are unsure about choosing individual shares can consider ready-made portfolios or diversified funds, which spread money across a mix of investments. These can provide an accessible starting point while helping reduce risk.

A cultural shift?

Reeves has made it clear that she wants to change Britain’s saving and investing habits. In her Mansion House speech earlier this year, she promised a campaign to highlight the long-term benefits of investing, arguing that too much focus has been placed on the risks rather than the opportunities.

If savings rates continue to fall, her ambition may be helped along by simple economics. Cash will always play a role for security and short-term needs, but for many, investing may now look like the more attractive route to long-term growth.

Is it safe to invest?

Of course, investing isn’t without pitfalls. Share prices can fall suddenly, meaning investors risk losing money, including part of their original capital. Charges and fees also make a difference over time, while short-term investing can leave savers exposed if markets dip just when they need their cash.

Perhaps the biggest risk, though, is human behaviour: selling in panic during downturns or chasing the latest “hot” investment rarely ends well. For most beginners, keeping it simple with diversified funds and a long-term mindset helps avoid these traps.

So what do I?

So you are feeling the squeeze but worried about investing? Or have seen the many guru’s on social media making it look easy when flexing their financial gains by investing in under-priced companies. Here’s some questions people often ask me.

Is it better to save or invest in 2025?

It depends on your goals and time horizon. Cash savings are best for short-term needs, emergencies, or when you need certainty. But with interest rates falling and inflation still higher than most savings accounts, investments typically offer stronger long-term growth.

How does the Bank of England base rate affect savings?

When the base rate falls, banks usually lower their savings rates. This reduces the return savers earn, and in periods of high inflation it means the real value of money held in cash can decline.

How does the Bank of England base rate affect mortgages?

The base rate directly influences tracker and variable mortgages. Fixed-rate deals are also affected because lenders price in expectations of future base rate changes. Recent cuts have eased pressure, but mortgage costs remain well above the ultra-low levels of the late 2010s.

Is investing safe?

Investing carries risks, share prices can fall, and you may not get back the full amount you put in. However, over longer periods (five years or more), investments in diversified portfolios have historically outperformed cash. Keeping a cash buffer for emergencies alongside investments helps reduce risk.

How much do I need to start investing?

You don’t need thousands to get started, or risk your income. Many platforms allow regular contributions from as little as £25 a month, so it really depends on your outgoings and circumstances. The key is consistency and diversification, drip-feeding money in helps smooth out market ups and downs while building the habit of investing.