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?
Some information © Fool.co.uk 2008
Claim back your mortgage exit fees
Possibly Related Posts:
- Clearing up the confusion over house prices
- Just why are we more likely to stick with our banks than our partners?
- How students are boosting the property markets in university towns
- Payday loans: helpful tool, or hopeless financial trap?
- Do holidays really kill the property market?
November 10th, 2008 at 9:34 am
Well I’m feeling all smug now as last week I transferred to a tracker mortgage, bring on the next reduction.
I think we can expect to see another drop of at least 0.5% or 1% but I can’t see the rate dropping below 2%, but I hope I’m wrong.
November 10th, 2008 at 10:46 am
It will be very interesting to see what happens. It would be a miracle if banks reduced tracker rates by 1.5%, having said that we now have a black american president which until recently would have been a miracle too.
November 10th, 2008 at 11:29 am
OK for you guys but really bad for those few who are prudent. This means a 33% reduction in income for us mugs who try to save and for pensioners. The message is clear that irresponsibility pays, so all you savers just blow the lot and then complain like everybody else does that you can’t afford to live. Don’t worry, some ambitious politician will take up your cause, buy your vote with a bit more of some other schmuck saver’s money, and all will be well. If you can’t beat ‘em join the rest of the pigs at the trough!
November 10th, 2008 at 1:58 pm
rodger i think what you saying their is disgusting people are not all struggling because they went out spending some people go out to work so they can earn and live quite happily but cause what the bank have done the BANKS not us we have been made to struggle, i work and not in financial difficulty and have been struggling like mad and not been able to save but at least i trying as our most others, bring on rate cuts cause i on a varible mortgage and could do with saving a bit rather than paying out all that i earn.
November 10th, 2008 at 3:22 pm
Im not saying having a mortgage is irresponsible, far from it. I am saying that banks who lend my savings to people who have no real expectation of paying back are irresponsible, as are those who borrow excessively. It should also be noted that anyone buying a house has a reasonable expectation over the full term of the mortgage of getting their mortgage and interest paid back when they sell the house even if they are currently in a negative equity position (check out what happened in the 70s and the 90s). A saver whose interest is cut will never make up the loss. In fact, only rarely will savers maintain the real value of their savings once tax is deducted from interest earnings.
So why save at all? Mainly for a rainy day such as we are having now, and for a deposit on your house (for the purpose of this argument you might consider pensioners as having a permanent rainy day). Anybody undertaking a mortgage should at least have the wherewithal to look at their cash flow and ask the bank to provide them with a payback schedule over at least the first seven years of the mortgage. It is also reasonable to show the borrower what would happen if interest rates increased by say two percent. Had these simple steps been taken over the last five years, house prices would be more affordable, the banks would not be broke, and we wouldnt be having this discussion. This is not rocket science, just prudent behaviour and, before you ask, did I do this 30 years ago? Yes I did, as did my daughter when she bought her house a year ago.
November 13th, 2008 at 10:01 am
Roger – Nice to see someone speaking some sense.