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Last Updated: Thursday, 4 August 2005, 13:42 GMT 14:42 UK
Q&A: Interest rate cut
Good news for mortgage holders, bad news for savers
The Bank of England has lowered interest rates by a quarter percentage point to 4.5% - the first change in the cost of borrowing since August 2004.

BBC News Online explains how this latest rate rise will affect your personal finances.

Why have rates come down?

The state of the economy allowed it.

Rates have been stuck at 4.75% for the last year to keep the economy under control.

During the period economic growth has slowed down, people have reined in their spending - though debt levels remain high - and the booming housing market has finally cooled off.

This has meant the Bank of England felt it could safely trim interest rates to give the economy the nudge it needed.

I have a big mortgage. Should I be dancing in the streets?

I wouldn't go that far.

A base rate cut theoretically leads to cheaper mortgage repayments for the UK's 11 million mortgage holders.

How will the rate cut affect your mortgage and savings?

But this is dependent on the latest quarter-point rate cut being passed on to mortgage holders by banks and building societies.

None of them are under any obligation by the Bank of England to pass on the quarter-point cut, but most are expected to.

The Halifax has already shaved its mortgage rates by the full quarter point. Other lenders are reviewing their options.

How much will I save?

That depends, of course, on how big your mortgage is and whether you have a fixed rate mortgage, or are on a standard variable rate.

Fixed rate mortgage holders will not see any change in their payments, but those under a variable rate will see about 12 knocked off the cost of the average 80,000 mortgage.

People with a 150,000 mortgage will see monthly repayments cut by about 25.

Is this the first of many rate cuts? Does this mean it's time to increase my mortgage?

No one can say for certain whether or not there will be further rate cuts on the way. That depends on how the economy performs over the next few months.

The Bank of England will do its best to avoid an overheating house market, which was one of the reasons why rates were increased last year.

Any signals that the house market might be spiralling out of control again will probably be met with a rate increase.

Consumer spending is another worry.

The recent slowdown in spending has helped to give policymakers scope for this month's rate cut. But, as with the housing market, the Bank of England is keen to keep consumer debt levels under control.

So, this rate cut is not necessarily a cue to go on a spending spree or raise more money from bricks and mortar.

I have several credit cards - all near their spending limit. Will the rate cut ease pressure on me?

Credit card rates are often high - much higher than mortgage rates - but they are less sensitive to Bank of England base rate movements than mortgages.

The rate cut may not feed through to credit card borrowers at all, particularly as the market place is notoriously competitive and many lenders already offer 0% introductory deals.

What about my savings?

A cut in base rates is never good news for savers.

But again this depends on how much lenders pass on the cut.

Very likely, most will clip the full quarter-point cut off your savings interest rate.

However, in the highly competitive world of the savings market rates offered are often well above the rate of inflation.

When rates are falling it is often a good time to shop around.

According to Moneyfacts, the current average gross savings rates are 3.16% on balances of 5,000 and 3.30% on balances of 10,000.


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