Page last updated at 17:27 GMT, Wednesday, 4 March 2009

Q&A: The bank rate cut and you

The Bank of England
The Bank of England has cut Bank Rate from 5% in April to 1% now
In February, the Bank of England cut its official bank rate for the fifth month in a row to just 1%. This Thursday, rates are expected to fall even further to 0.5%, the lowest in the bank's 315-year history.

We look at how the latest cut will affect borrowers and savers.

Will my mortgage be cut quickly?

For some borrowers, the answer is yes.

These are the people whose home loans are tracker deals which move in line with the Bank of England's bank rate.

They will be joined by those who are on a standard variable rate which has a contractual clause obliging their lender to move their rate in line with bank rate too.

Ray Boulger, of the mortgage broker John Charcol, estimates that there are about 4 million borrowers in these categories, out of the total of about 11.7 million, who will therefore benefit quickly.

Fixed-rate mortgages will, by definition, stay the same.

As before though, lenders may take their time deciding if they will cut their standard variable rates, and it seems unlikely that all lenders will implement a uniform 0.5% reduction.

What about savers?

Building societies have complained that any further cuts in bank rate will be particularly bad for savers, as rates on savings and deposit accounts have tumbled along with mortgage rates.

The average rate available on an instant access bank or building society savings account was already below 1%.

In an ideal world banks and building societies would like to widen the profit margin on their lending to home buyers, to help restore their profits and reserves which have taken a battering in the past year.

Building societies in particular would like keep mortgage rates up so they can also maintain their savers rates at even modest levels.

They are worried that if these are cut any further than people will simply stop saving with them, and that in turn will cause their own supply of mortgage funds to dry up.

And that would be precisely the opposite effect to the one that the government, and the Bank of England, are hoping to achieve.

I am dead keen to buy a flat or house. This is even better news, surely?

The monthly repayments on your prospective home loan have been slashed dramatically in the past few months.

A few lucky borrowers whose tracker rates are set below bank rate are now about to find that their interest payments - though not capital repayments - almost disappear, saving them hundreds of pounds a month.

The advice for them is to take advantage of the situation and use this interest payment "holiday" to pay off more of the capital they borrowed - or pay off other expensive debts such as credit cards - thus saving themselves large interest payments in the future.

But whether or not a prospective first-time buyer benefit from all this depends on whether or not they have managed to get a loan at all.

They now need to scrape together a deposit of at least 25% of the value of the home they want to buy.

In fact, 64% of all deals now require a deposit of at least 25%.

And about a quarter of all deals, those with the most attractive interest rates, now require a huge 40% down payment.

"Concern over getting a mortgage or getting a large enough mortgage is a much greater worry than affording mortgage repayments," said Adrian Coles of the Building Societies Association (BSA).

If you do not have that sort of cash to hand, you will simply not be given a loan, as lenders are still rationing their scarce funds and protecting themselves against potential losses due to the continued slump in house prices.



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