An unusual number of banks and building societies responded almost immediately to Thursday's rate cut. Given all the recent publicity surrounding the plight of savers, they pledged to protect these customers from the impact of the latest half-point reduction.
Barclays said it would not be reducing savings rates again this month; HSBC and Yorkshire Building Society also underlined their commitment to their savings customers. But read between the lines and this suggests borrowers on mortgage deals linked to their standard variable rate won't see their monthly payments fall. And for many this won't be the first month they've not benefited from the recent interest rate cuts.
The base rate has fallen 4.5 percentage points since last October, yet Yorkshire has cut its SVR by just 1.91%, Woolwich, Barclays' lending arm has only reduced its SVR by 2.15% and HSBC's SVR has fallen by 2.31%.
Interest rate cuts are bad news for savers, but you'd expect them to be good news for borrowers. However, as the current cycle of rate reductions highlights, this can be far from the case.
Millions of borrowers with tracker mortgages, which are directly linked to the Bank rate, will see their monthly repayments fall again following this month's decision. Many will now be paying less than 1% interest on their home loans. Someone with a £150,000 25-year repayment mortgage will have seen their monthly payments fall from £877 to £533 since October.
However, a greater number of borrowers won't benefit from the rate reduction. Around 50% of outstanding mortgages are fixed rates so borrowers with these deals haven't seen any reduction in their monthly payments.
Then there are those on deals linked to their lender's SVR who have lost out because, despite being on a variable rate deal, they haven't seen their mortgage payments fall in line with Bank rate.
So with so many borrowers losing out in the rate cuts are savers benefiting?
Despite growing claims that banks and building societies are seeking to protect savers, many savers would argue otherwise.
Returns on savings accounts have plummeted and even if some institutions such as Barclays don't reduce their savings rates again this month, it won't ease the problems many savers are facing. And many have already been hit harder than borrowers.
For example, while Yorkshire's SVR has only fallen by 1.91% since October, its savings rates have been slashed by an average of 3%. Yorkshire is also one of the providers that has implemented a collar on its tracker mortgages meaning that borrowers with these deals won't see their payments fall any further.
Research from moneysupermarket.com shows that the average savings rates have fallen by an average of 3.22% since October, compared with SVRs which are down by an average of 2.29%. The average easy access account is paying 0.9% and nearly 200 accounts are paying 0.25% or less. And even if some providers do refrain from reducing savings rates again this month, this won't happen across the board so the number of accounts paying less than 0.25% will inevitably rise.
What should borrowers and savers do now?
Borrowers
Traditionally, most borrowers have been better off remortgaging onto a new mortgage deal once their fixed or discounted term ends. This is because the rates on new deals tended to be significantly lower than the SVR or long-term tracker rate borrowers move onto once the introductory period ends.
However, lenders have been widening the margins between mortgage rates for new customers and the Bank of England rate. As result, even though many SVRs haven't been cut by as much as the Bank rate, the rates have fallen which has meant that remortgaging isn't always the best option - in some cases the SVR is lower than the best rates a borrower could get on a new mortgage deal. An increasing number of people have therefore been choosing to stay on the SVR.
The tide could well be turning again though. Rates on new mortgage deals have been edging downwards and with more lenders opting not to cut their SVRs, anyone who is coming to the end of their mortgage deal or who is already paying their SVR should look into whether or not they'd be better off remortgaging. If you are not confident about doing the calculation yourself, a mortgage adviser will be able to help.
The best deals are still only available to those with sizeable deposits. HSBC has just launched a two-year fixed rate at 2.89%. This is available for loans up to 60% of a property's value and there is a £1,499 arrangement fee. Alternatively if you do not have 40% to put down, First Direct has a two-year fix at 2.99% available for loans up to 75%. The fee on this deal is £898.
If you'd prefer a longer-term fix, Abbey has the market-leading five-year deal at 3.95%. The arrangement fee is £995 and the product is available for loans up to 60%.
If you'd prefer a variable rate deal, First Direct has a lifetime tracker at 2.89% with a £799 fee. This is also an offset, so you can set your savings against your mortgage which reduces the amount of interest you pay on your mortgage. With savings rates so low, this is an attractive option at the moment, although you'll need a 25% deposit to qualify.
Life remains tough for those who don't have much equity in their home, and first time buyers who haven't saved up a sizeable deposit. Clydesdale Bank has the leading deal available for loans up to 90%. It is a two-year fix, but the rate is 5.99% - 5.49% above the Bank rate.
You don't have to pay so much of a premium if you can scrape a 20% deposit together. First Direct has a lifetime tracker at 3.09% that is available for loans up to 80%. The fee on this deal is £999.
Hopefully mortgage rates should come down further in the coming months. The Government and Bank of England are desperate for institutions to start lending again. Therefore as well as cutting interest rates this month it also announced a new measure called 'quantitative easing'. Over the next three months, the Government will pump £75billion of new money into the system by purchasing bonds from financial institutions and other firms. The theory is that banks will then have more money which in turn can be lent out to individuals and businesses. If this strategy works, we should see more competitive mortgage deals launched in the coming months which will help bring an end to the mortgage impasse that is currently strangling the market.
Savers
It's undoubtedly a terrible time for savers, but many will be able to improve their situation by moving their money to a new account.
If your savings have been in the same account for some time, you will probably be able to get a better deal elsewhere. The leading accounts are paying significantly more than Bank rate.
If you haven't used your Isa allowance yet this year, a cash Isa should probably be your first port of call. Kevin Mountford, moneysupermarket's head of banking, explains why this is the case in his article 'How to choose a cash Isa'. The article also includes a run down of the best deals, but among them are Natwest's Cash Isa Plus at 3.51% (although you only qualify if you have a Natwest current or savings account) and Abbey's Reward Isa at 3.50%.
If you have more than £3,600 in savings or have already used your Isa allowance for the current tax-year, the best rates are available on fixed rate bonds. ICICI Bank has the leading two-year bond at 4.10% on balances of £1,000 or more. If you don't want to lock your money away for that long, ICICI has the best one-year fixed rate bond at 3.90%.
You should move quickly if you want to take advantage of one of these deals however. With interest rates having been cut again this month, demand is likely to be high and they may not be available for much longer.
The leading easy access accounts are paying around 3% although be warned, these rates could fall in the next few weeks as providers respond to the latest rate reduction. Egg's Savings Account has the highest rate at 3.35%, while Alliance & Leicester, ING Direct and Bradford & Bingley are all offering rates of 3.0%.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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