Page last updated at 13:38 GMT, Thursday, 10 April 2008 14:38 UK

Q&A: Interest rates and you

Bank of England building
Policymakers are worried about the economy

Interest rates have been cut to 5% following the Bank of England's latest rate-setting meeting.

The Bank decided that the risk to the economy of the disruption in the financial markets outweighed the risk of higher inflation.

Despite the cut, there is no guarantee that lenders will respond by lowering all their mortgage rates.

Savers, however, may see their returns cut.


How will my mortgage be affected by a rate cut?

If the reduction is passed on by lenders in full, then a quarter of a percentage point cut will knock between 15 and 20 off the monthly repayments of a 100,000 mortgage.

But that only applies to the minority of people on their lender's standard variable rate, or others on variable deals such as base rate trackers.

Many other people's mortgages, which are fixed for a period of time, will not be affected by the rate cut.

There are nearly 12 million households with a mortgage in the UK, and about half are currently on fixed rates, which will be unaffected.

I am a saver. How will I suffer?

You may not.

Following the latest move by the Bank of England, it is likely that the rate that you receive on your savings will fall.

However, the rate cut may not be passed on leaving savers' returns untouched.

Banks and other lenders usually wait a while before passing on any rate movement, either up or down.

And savings institutions are very keen at the moment to attract new depositors as they have been finding it almost impossible to borrow from each other in the financial markets.

So they have an incentive to keep their savers' rates high, on at least some of their accounts.

But some accounts are linked directly to the Bank of England's base rate and so will fall automatically.

The advice from experts is to watch your savings account carefully as the market is very fluid and competitive.

I want to sell my house. Will this improve my chances of finding a buyer?

Probably not.

Getting a mortgage is now much more tricky - with lenders being much fussier about who they will offer a home loan to.

This week, the Abbey removed the last 100% mortgage from the market, meaning that anybody wanting to borrow money to buy a house will have to save up a deposit.

Currently, the UK housing market is going through a slowdown after years of boom.

This week, figures from the Halifax suggested the average house price fell by 2.5% in March alone - though there were wide regional variations.

Not only are prices slowing down, but the number of would-be buyers is shrinking.

The cut in borrowing costs by the Bank of England is unlikely to reverse that trend any time soon.

So if you want to sell your house quickly, you may have to cut your asking price.

Will people on the edge of insolvency be saved?

CONCERNED ABOUT DEBT?
National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, partly funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK

UK consumers have indulged in an unprecedented borrowing binge in recent years.

For instance, since 2000, about 300bn has been borrowed by people against the rising value of their homes.

More recently, overall consumer borrowing has, in fact, been slowing down.

A rate cut will help a few people who have been on the edge of going bust.

But most people in debt would need to see more cuts for the cheaper cost of borrowing to have much fundamental effect.

What about me? I have several credit cards - all near their spending limit.

Credit card interest rates are less sensitive to Bank of England base rate movements than mortgages.

There is no guarantee at all that the rate cut will be fed through to you.

If you want to reduce the interest you pay on credit card debt, the best thing to do may be to scour the market for a card that charges less and to transfer your debt.

The variation in the monthly rates charged on credit cards is huge, and many people are paying far more than they need for the convenience of their bit of plastic.




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