What does the interest rate cut mean for you?
January 7, 2008
In December the Bank of England announced the news that many homeowners and industry professionals had been waiting for - that the base interest rate was to be dropped by 0.25% following several months of sitting at 5.75%. In August 2006 the base rate had stood at 4.5% but a series of five interest rate rises between August 2006 and July 2007 saw the base rate shoot up by 1.25% to 5.75%. This left many people struggling with repayments on their mortgages, and saw the level of repossessions rise in the UK.
After many calls for an interest rate cut from both industry professionals and consumers the Bank of England finally announced the good news following the December Monetary Policy Committee meeting. For many homeowners this news meant that they could enjoy a little more breathing space when it came to repayments due to reductions in the amount that would have to be paid out each month. But will the interest rate cut affect everyone in the same way?
When the Bank of England announced the 0.25% interest rate cut a number of lenders responded right away by announcing that they would be passing on the full interest rate cut to borrowers either right away or starting from January. Those on base rate tracker mortgages will find that they benefit from the interest rate cut right away because their mortgage follows the base rate, tracking any rises or falls accordingly.
There have been concerns that some people on variable rate mortgages may not benefit fully from the interest rate cut, as some lenders have indicated that the full rate cut may not be passed on to the borrower. Consumers will therefore have to keep an eye on their interest rates in order to ensure that the lender does in fact intend to pass the interest rate cut on in full – and if not, perhaps the time has come to look at remortgage options.
Those in fixed rate mortgages will not feel the effects of the interest rate cut at this stage, because the interest rate on fixed rate deals is set for a certain period of time during which time it can go neither up nor down. However, those on cheap fixed rate mortgage deals that are due to come to an end will find that the impact of higher repayments is lessened a little because of the small drop in the base rate, and the further cuts that are expected in the first half of 2008 could help those on cheap fixed rate deals further, as their fixed rate terms come to an end.
Savers will also be affected by the cut in interest rates, and already some banks have announced that they are cutting the interest rate paid on many of their accounts. Savers should keep an eye on this situation to make sure that they do not get a raw deal with their savings account interest, and if necessary look at switching to an alternative savings product.
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