In a shock move, the Bank of England has slashed its Base Rate by 1.5%!
The Bank's monetary policy committee cut to 3% from 4.5%, is a response to huge pressure from industry and unions to make a deep cut in borrowing costs.
Today's surprise reduction by the Bank of England is the biggest single cut since March 1981 when the interest rate was reduced by 2%. The last time borrowing costs were cut by 1.5% was back in August 1854.
The 1.5% cut brings some early festive cheer for around 4.2 million of you on tracker mortgages and 800,000 on lenders' standard variable rate mortgages.
For borrowers, those whose lenders pass on the full rate will be considerably better off. Repayments on a £200,000 mortgage costing 6.5% rather than 7%, will fall by £66 a month, saving you more than £700 a year.
Cheltenham & Gloucester, the mortgage arm of Lloyds TSB, was the first lender to show its hand. The lender, (soon to be 43% owned by the government) has committed to passing on the full 1.5% cut in interest rates to those of you on a variable rate deal.
If you are a household with a £150,000 loan will save £187.5 a month on the cost of your interest only mortgage repayments after the cut in rates.
HSBC, Nationwide, Barclays and Royal Bank of Scotland said they were reviewing the situation. There was no immediate comment from HBOS, the country's biggest mortgage lender, but together with RBS, it will be under huge pressure to pass on the full effect of the rate cut.
Although the large cut is an important one, its clear that many of us want even more rate cuts.
Impartial finance website Fool.co.uk welcomed the Bank of England’s decision to slash the rate, but a recent survey by them shows that most of us expect interest rates to fall to, on an average of estimates, 2.85%.
Four out of five of us hope that rates will be cut to below 3%, and one in three expects rates to be reduced to below 2%. One in a hundred wants to see the Bank of England cut rates to 0%.
David Kuo, Head of Personal Finance at Fool.co.uk, says:
“There are now numerous signs that the UK economy is struggling. It is in desperate need of a jolt to shake it back into life.
“More importantly, the central bank must be seen to be fulfilling the expectations of consumers. This is vital if interest-rate cuts are to provide consumers with instant gratification.
“As it stands, the Bank of England rate cuts have not been fully passed onto consumers. In time it will, but only if the Bank continues to cut hard and cut fast. This is no time for holding back if the Bank of England is determined to breathe life into the dying economy.”
Pros and cons
Well the rate cut is great news for those of you who are on tracker mortgages.
Mortgage lenders are obliged to pass on the cut so your monthly repayments are set to plummet. If you can afford to (and your lender allows it) it might be wise to keep repayments at your current level.
That way you can pay off your mortgage early or build up a buffer in case you want to take a repayment holiday later – or remortgage to a lender that wants a bigger deposit. If you can't afford this, you will see extra money freed up to cope with the rising bills we all seem to be facing.
However, the cut will inevitably be bad news for savers – who have already seen interest rates drop below inflation.
Some banks and building societies have kept rates high to attract money, but some of you have already seen rates cut by 0.5% since the start of October.
If your savings rates drop by another 1.5% you could end up thinking that you may as well not bother!
What do you make of the drastic interest rate cut?
Is it enough or should it have been even more?
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