Much of the UK breathed a sigh of relief earlier this month when the Bank of England announced that interest rates were being cut by a quarter point taking the base rate from 5.75% to 5.5%. This was the first cut in two years, and followed a series of five interest rate rises between August 2006 and July 2007, followed by five months of rates stagnating at 5.75%. Many industry professionals and consumers had been calling for the Bank of England to cut interest rates, as homeowners struggled to keep up with mortgage repayments and repossession levels went up.
However, although the Bank of England has now responded to calls for interest rate cuts by shaving a quarter of a percent off the base rate, not everybody will necessarily benefit from this rate cut. Firstly, although those on base tracker mortgages will enjoy the benefits of the interest rate cut right away, those on fixed rate mortgages will not see any benefit at all. Many people flocked to take out fixed rate deals whilst interest rates were rising, but now that the rates have fallen - and are likely to continue falling over the coming year - these homeowners are stuck with the higher interest rate attached to their fixed rate deal.
Then there are the banks and how they will be dealing with the interest rate cut. A number of major lenders decided to cut their rates for new borrowers right away after the base rate was cut, and for existing borrowers from January, passing on the full 0.25% cut to borrowers. However, there are other lenders that are still debating what to do, and there are concerns that some lenders could fail to pass on all or even any of the rate cut, which means that some borrowers could find that they do not benefit from the rate cut.
In addition to the interest rates on borrowing the base rate cut will also affect interest rates on savings, so those with savings but no borrowing will find that they definitely do not benefit from the rate cut. This is because they will earn less interest on their savings yet will not be able to offset this against paying less interest on borrowing if they have no mortgage debt.
The interest rate cut, although welcomed by many, will therefore affect people in different ways. Many consumers may now start hunting around for new savings accounts to avoid losing too much interest, or for a new mortgage in the event that their lender fails to pass on the rate cut.
