Rate cut Q&A: How it Affects You - Mortgages - News - Moneyfacts


Rate cut Q&A: How it Affects You

Rate cut Q&A: How it Affects You

Category: Mortgages

Updated: 07/11/2008
First Published: 07/11/2008

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Moneyfacts' Darren Cook brings you up to speed.

1. How will the 1.5% cut in the base rate of interest affect a current homeowner?

Homeowners on an existing tracker rate mortgage will feel very pleased with their product choice. They will see the full benefit of the rate cut and will save around £122 on a £150K repayment mortgage. Fixed rate mortgage holders will receive no benefit and homeowners on a standard variable rate will need to wait and hope that their lender feels generous and decides to pass on the full benefit on.

2. How good was yesterday's news for a first time borrower?

When or if lenders decide to filter the rate cut down to their products for new borrowers, this will be good news for first time buyers as the potential monthly repayment will be cheaper. However, first time buyers still face falling house prices, stricter lending criteria and larger deposit requirements.

3. What should an eager, would-be first time borrower, do today?

Either avoid the temptations and cash in when property prices hit their lowest levels or if you spot your dream property now, you will need to raise a deposit of at least 20 to 25 per cent. Raising this level of deposit on a personal loan could be expensive at the moment, so preferably the first time buyer will need to have savings at hand or get some financial help from family members.

4. Is the rate cut bad news for savers? What can they expect?

Any rate cut is bad news for savings, especially one as historic as this latest one. Rate cuts at these levels are introduced to kick start the economy and encourage further spending to help the economy along. However, banks are still not lending to each other, so some higher savings rates are still being offered to customers to help with their funding needs.

5. What are the best rates (or products) available now?

Current short term fixed rate bonds best buys include:

ICICI Bank UK at 7.10% for 12 months (min £1,000)

Anglo Irish Bank at 7.05% for 1 year (min £500)

SAGA at 6.90% for 1 year (min £1)

6. What does the jumbo rate cut mean for investors?

Investors will not get the returns that they have been used to over the past few years. They will need to do a little extra market research and shop around for best returns. Investors will need to evaluate at which risk levels they wish to take on investments, as higher risks will normally generate higher returns. Prudence might be needed in the current climate.

7. The banks are taking a lot of stick for not immediately passing on the cut. Is the criticism warranted? Both personal and business customers need a reduction in the cost that they are paying for mortgages, loans and overdrafts and the bank base rate should be an indication of how much this should cost. However, banks can't afford to pay these lower rates until the interbank lending rate reduces. Customers are demanding quicker actions and banks need to communicate their intentions quicker.

8. What are the factors stopping lenders slashing rates?

The main cause is LIBOR. There is still a large amount of distrust between banks and the rate remains significantly higher than base rate. Until this rate declines and the lenders can obtain their funding for mortgages at a lower rate, we are unlikely to see the cut passed on in full. This morning, LIBOR was reduced to 4.49% which will hopefully encourage lenders to pass on some of the benefit.

9. If not after this big cut, then when can we see an easing of lending rates?

I would think that a month will be long enough for LIBOR to catch up to base rate. If lenders decide not to pass on a benefit now, we would expect that cuts will still be on the agenda later on.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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