Will anyone benefit from this month’s rate cut?

The Bank of England’s Monetary Policy Committee has voted to cut interest rates again, taking the base rate to 1.0% - its lowest level ever.

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But many are critical of today’s decision saying it will do little to help boost the economy and that as far as most consumers are concerned there will be no positive impact.

In a poll carried out by moneysupermarket.com following last month’s reduction, 67% of respondents said they didn’t welcome the move. This was for a number of reasons – savers were obviously unimpressed because, as has been seen, it resulted in the further erosion of savings rates. Many, particularly those who rely on savings interest to supplement their retirement income, are really suffering because of the recent rate cuts. The average savings rate is paying less than the base rate.

Kevin Mountford, head of banking at moneysupermarket.com, said: “This is a real blow for the nation’s savers as they are already struggling to make a decent return on their money. On the one hand the Government is trying to encourage people to save more but on the other it is giving little incentive to do so. Savings rates are likely to fall further in the coming weeks as a result of today’s decision.”

And even many borrowers, who you’d expect to be hoping for lower interest rates, don’t want Bank rate to come down any further as they’re not benefiting either: This is because they’re on fixed rate mortgages, or because their lender hasn’t passed on the reductions.

Of the 20 largest residential mortgage lenders, Lloyds TSB/Cheltenham & Gloucester is the only lender to have reduced its standard variable rate (SVR) by the full 3.5% since the Bank started slashing rates last autumn.  Others, such as Yorkshire Building Society, chose not to reduce their SVR at all following January’s reduction. Yorkshire said the decision was taken so it could protect savers from the full brunt of the rate cut. Most of the society’s tracker mortgage customers also saw no cut in their monthly repayments. Trackers are set at a fixed margin to Bank rate which means the mortgage rate should move in tandem, but Yorkshire has a 3% ‘collar’ on many of its tracker loans which means it doesn’t have to pass on reductions if the rate hits that level.

Nationwide’s tracker mortgages also have a collar – most of which kick in at 2.75%. While it decided not to impose it following December’s one-point Bank rate reduction, it said last month that its tracker customers wouldn’t see their mortgage rates fall any further.

There is also a growing feeling among analysts that mortgage rates for new customers aren’t likely to get any lower.

Louise Cuming, head of mortgage services at moneysupermarket.com, said: “I don’t think a lot of lenders will be able to afford to pass this rate cut on to borrowers so I doubt mortgage rates will change much.”

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So what now?

Borrowers

Some borrowers will benefit from today’s rate reduction. Anyone with a tracker mortgage that doesn’t have a collar should see their payment rate fall by the full half-point cut. This will knock £35 a month off the repayments of someone with a £150,000 25-year repayment mortgage.

And if you’re looking for a mortgage but have been holding off in case rates fall further, now could be the time to act. The best deals are still only available to those with large deposits but if you have 25% or more to put down, Natwest has a two-year fix at 3.49% with a £799 fee. The leading tracker is from First Direct at 1.89 point above Bank rate so the pay rate will be 2.89% following today’s cut. This is a lifetime deal at 1.89 points above Bank rate. The fee is £799 and it is available for loans up to 80% of the property’s value.

Rates are higher for those with smaller deposits. Cheltenham & Gloucester has the leading rate for those needing to borrow up to 90% of the property’s value. It has a two-year fix at 5.69% with a £1,094 arrangement fee.

For more information on the latest mortgage rates, click here.

Savers

Mountford added: “Life’s tough for savers but there is a big difference between the best and worst rate so it’s more important than ever to ensure you are earning the highest possible return.”

The leading savings accounts continue to pay significantly more than the 1.0% Bank rate so it is well worth making the effort to find the best deal.

If you’ve got money you can afford to lock away ICICI Bank’s HiSave Fixed Rate Account is paying 4.3% for one year. You will need to move quickly if you want to secure one of the current fixed bonds, as providers could well replace their offerings with lower-rate deals following today’s rate cut.

And don’t forget your Isa allowance – you can invest up to £3,600 a year in a cash Isa and returns are tax-free, so make use of this tax break if you haven’t already done so.

If you opt for a variable rate account however, remember that the interest rate will probably fall in the coming weeks.

For more information on the latest savings rates, click here.

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