How the rate cut affects you

Mortgages | UK

How the rate cut affects you

From mortgages to savings, what does it mean to you

Should you quit your fix and pay the penalty?

Half of all households with mortgages have fixed-rate deals and will see no benefit from this weeks rate cut. Some of those who took out their fixed rate recently (at rates typically around 5.5%-6%) will be kicking themselves that they didnt opt for a base rate tracker - particularly as further interest rate cuts may come in the following months.

Is now the time to ditch the fixed rate in favour of a tracker - even if that means paying a penalty to escape the current deal?

You will need to look carefully at the maths to see whether it is going to be worth your while moving. The bottom line is that you need to save more than you will have to fork out.

The problem, of course, is that lenders have been frantically pulling their best trackers and replacing them with deals with higher rates, and it means you are taking a gamble that interest rates will continue to fall.

Borrowers who have mortgages on the lenders standard variable rate or a discount to the SVR must now sit tight and wait to see whether their lender gives them none, some or all of the base rate cut.

Where to get a home loan now
Firstly, forget finding a 3% mortgage - they dont exist. Broadly speaking, mortgage brokers are forecasting that two-year fixed rates - currently around 5.75% - will soon fall to around 5%. But tracker rates - which until recently were priced at best at base rate plus 1% - will now move to base rate plus 2%. In effect, you wont find a loan anywhere much below the 5% level.

If you want to benefit from the further base rate cuts that many expect, a tracker mortgage is, in theory, the best bet. Fixed rates for those borrowing up to 75% of the propertys value have recently started slowly falling in response to lower money market swap rates, but look very expensive when the base rate is at 3%, let alone when one bears in mind the further cuts expected

Please note: You may also have to pay a fee for independent mortgage advice.

Savers: The scramble is on
Over the last year, savers have been enjoying some of the best returns for a decade as the banks, desperate to boost deposits as a result of the credit crisis, have been offering attractive rates - in many cases in excess of 6%.

It has been possible to find internet-only savings account paying 6.28% before tax. A number of fixed rate bonds were paying 7%, while plenty of current accounts have paid around 5%. Those days now look to be over. National Savings & Investments said the rate payable on its direct ISA would fall by 1.5% from 4.8% to 3.3%. Northern Rock spoke for many when it said it would be announcing how it would change savings rates over the next few days.

The major banks were claiming it was too soon to say what would be happening to savings rates - but the expectation is that they will come down across the board.

Credit cards
The typical credit card now charges an APR of five times base rate - but chances of cuts are slim. Barclaycard, which currently charges 14.9% on most of its product range, said it would not be adjusting rates as a result of the Bank of England cuts.

Annuities
With the return on many government stocks hitting an all-time low, its yet more gloom for those about to retire. Annuity rates - which largely depend on gilt yields - are set to fall. And with rates likely to go even lower next year, there is no sign of a rebound to better pension payments.



CAVEAT
Your home may be repossessed if you do not keep up repayments on your mortgage.

Levels and bases of, and reliefs from, taxation are subject to change.