But a growing number of analysts suggest that further rate cuts aren't the answer to Britain's economic woes and judging by the results of
moneysupermarket.com's exclusive poll, consumers don't think so either.
We asked if you welcomed last Thursday's half point cut in interest rates, which took the Bank rate down to 1.5% and 67% said you didn't. So why is the Bank of England's decision to reduce Bank rate again so unpopular and what will it mean for person on the street?
Savers suffer
The plight of the saver has come to the fore in recent weeks and it is set to worsen following the latest cut. A number of providers have already announced lower savings rates.
For example, ICICI Bank reduced the rate on its one-year HiSave Fixed Rate Account from 5.10% to 4.65%, although this is still a market-leading deal. The rate on its variable rate account has fallen from 4.5% to 3.55%. And Alliance & Leicester has cut its eSaver rate from 4.0% to 3.6%. Again though, despite the lower rate, it is one of the leading easy access deals.
While savings rates are falling, there is still a big difference between the best and worst deals. Millions of people have money sitting in accounts paying less than Bank rate - if you are one of them move your money to an account paying a higher rate. Your priority must be to maximise returns at the moment.
If you have money you can afford to lock away, go for a fixed rate account as this will protect you from further rate cuts. As well as the ICICI deal mentioned above, Anglo Irish Bank has a one-year fixed rate bond at 4.60%.
If you've not yet used your Isa allowance this year, consider a cash Isa as interest is paid tax-free. You can invest up to £3,600 each tax year although some products will allow you to transfer funds invested in previous years.
Nationwide building society has a two-year fixed rate Isa at 4.0%, although this doesn't accept transfers. Derbyshire building society's two-year fixed rate Isa at 3.95% does however accept money invested in previous tax years.
If you don't want to lock your money away for that long, Nationwide has a one-year fixed rate Isa at 3.75%. Alternatively, you could go for a variable rate account - but bear in mind the rate will probably fall in the coming weeks. Birmingham Midshires' Direct Isa (Issue 3) is paying 4.0%, as is Manchester building society's Premier Instant Isa. The Manchester deal accepts transfers but the Birmingham Midshires account is for new money only.
If you have already used your Isa allowance and are looking for a standard easy access account, the leading rate is from ING Direct at 5.0%. However, this includes a one-year bonus of 2.17%. Other deals include Anglo-Irish Bank's Easy Access Account Issue 2, at 4.55% and Egg's Internet account has a rate of 4.0%.
Be careful if you apply for a variable rate account in the next few weeks however, as the advertised rates could well fall when the providers respond to this month's rate cut.
What about borrowers?
Millions of mortgage borrowers will benefit from the latest rate reduction. The majority of people with tracker mortgages will see their rate fall by the full half point - this will knock £36 a month off the cost of a £150,000 25-year repayment mortgage.
Many of those on their lender's standard variable rate (SVR), or a deal linked to SVR, will also see their repayments fall although by how much, remains to be seen.
Lloyds TSB/Cheltenham & Gloucester (C&G), HSBC, Nationwide and Skipton building societies have said they will reduce their SVRs by the full 0.5 points but not all lenders will follow suit. In fact, Halifax, the country's largest mortgage provider has already confirmed its SVR will go down by just 0.25 percentage points.
It is highly likely that a number of lenders will decide not to reduce their SVRs at all, and even some of those with tracker mortgages won't see their payments fall. This is because, despite being directly linked to the Bank rate, certain tracker products have a 'collar' attached which gives the lender the right not to reduce the rate if Bank rate falls below a certain level. Nationwide has a collar which can kick in if Bank rate drops below 2.75%. When that happened last month it decided not to impose the collar, but it has already confirmed that its borrowers with tracker loans won't benefit from the cut this time around.
Therefore even though lower interest rates should be good news for those with variable rate mortgages, many of these borrowers will not reap the full benefit of the latest reduction.
And of course, those with fixed rate mortgages - around 50% of the home loan market - will see no reduction in their monthly repayments.
Is the rate cut good news for those looking for a new mortgage?
Mortgage rates are lower than they were this time last year and we should see them nudge down further in the coming weeks if the cost of wholesale borrowing falls following the latest rate cut. However, rates on deals for new customers may not fall by the full half point.
The margin between mortgage rates and Bank rate has widened. This is partly due to the fact wholesale borrowing costs haven't fallen by as much as Bank rate, but also because lenders are looking to widen margins and protect profitability.
And the best rates are only available to those with large deposits. There is still a severe shortage of funding which means institutions have limited money available to lend. This, coupled with falling house prices, means banks and building societies are lending to lower risk borrowers - those with significant equity in their homes.
If you need to borrow more than 75% of your property's value, it remains difficult to get a mortgage and many first time buyers are really struggling. Bank of Ireland, which owns Bristol & West, has announced it is withdrawing from the UK intermediary mortgage market. This is a blow for aspiring homeowners as Bank of Ireland was the only provider still willing to lend up to 95% to first time buyers. The minimum deposit you now have to put down in order to get on to the housing ladder is 10%. C&G, Britannia building society, The Post Office and Royal Bank of Scotland all offer 90% loans that are available to first time buyers. The rates are not the most competitive however.
C&G has a product that is fixed until April 30 2011 at a rate of 5.69% with a fee of £1,094. If you want a lower arrangement fee, Britannia has a fee-free five-year fix that's available up to 90%, but the rate is higher at 6.09%.
Borrowers with larger deposits can get lower rates. First Direct has a lifetime offset tracker at 3.39%. There is a £799 arrangement fee and the deal is available for loans up to 80%.
If you'd prefer a fixed rate, Mansfield building society has a two-year fix at 3.99% with a £999 arrangement fee. However a minimum deposit of 40% is required. If you have less than that, C&G has a two-year fix at 4.69% which is available for loans up to 75%. This deal carries a higher set up cost of £1,094.
The leading five year fix is from Britannia at 4.69%. This is available to those with a deposit of 40% and the arrangement fee is £549.
However, if you want to fix your mortgage, the message from some analysts is not to hang around. Fixed rates could rise, rather than fall in coming weeks despite the latest rate cut. The reason for this is that the City expected a bigger rate cut - the markets had priced in a reduction in Bank rate of between 0.75 and one percentage point, so the fact that Bank rate was reduced by just half a percentage point, may result in an increase in the cost of funds used for fixed rate mortgages.
Are further rate cuts likely?
Some analysts believe there is little point in reducing interest rates further because the cuts are proving increasingly ineffectual. Consumers aren't spending more as a result of the cuts because they either aren't benefiting from them or they're too worried about the recession so are saving anything they have spare instead. And lower rates will further weaken the pound.
However, the consensus seems to be that there are further rate cuts to come this year and that Bank rate may even fall to zero.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
Rate This Article
Click on a star to rate this article.
