Thursday, 7 June 2012

If the Bank cuts rates...

It seems a long shot that the Bank of England would cut its base rate by 0.25% today, something the IMF suggested last month would be a helpful move. A reduction would leave the rate at a new record low of 0.25%.

But if it did, who would be affected?

Mortgage borrowers would feel the most immediate impact.

Around 2.5m households are likely to be on base rate trackers. That means their mortgage payments are tied to Bank base rate and go up or down as the rate moves.

In addition, at least a million are on a special form of Standard Variable Rate which would change. Their interest rates can't be more than 2% higher than base rate. Since they're at the maximum level already, a cut today would mean a cut in their payments.

So between 3.5m and 4m households could gain. A typical repayment mortgage of just over £110,000 would be £14.84 cheaper a month after a 0.25% reduction.

Other people on SVR would have to wait to see if they were affected, possibly not, while the large numbers on fixed rates wouldn't see any benefit.

What about savers? Their fear is that returns would dwindle even further.

Some banks would be likely to use a base rate cut as an excuse for lowering rates. However, the linkage is much less clear.

The current best savings rates of around 3% for an instant access account are kept up by desperation on the part of lenders to raise cash to lend out as mortgages.

Banks and building societies are cutting back lending because it's still tricky to raise the cash from international financial markets - savers are the only solid alternative.

In any case, those 3% accounts are only offered as a lure to bring in new deposits. The average interest rate is 0.22% for instant access savings at bank branches and 0.66% for tax-free cash ISAs.

Those paltry rates aren't likely to change much, even if the Bank tries to make money cheaper.

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