Page last updated at 12:21 GMT, Thursday, 5 March 2009
What low interest rates mean for you



By Ian Pollock
Personal finance reporter, BBC News

The Bank of England has cut its main lending rate, Bank Rate, to just 0.5%.

Northern Rock branch during the 2007 "run"
Northern Rock became very popular with savers after nationalisation
It has never been this low before.

On the face of it, this should bring unbridled joy to people who have borrowed, or want to borrow, large sums of money, such as a mortgage.

Indeed, people whose home loan repayments consist mainly of interest have already seen their monthly outgoings slashed dramatically.

Ray Boulger of mortgage brokers John Charcol said 3.5 million people with tracker mortgages had now seen their interest rates fall by 4.5%, cutting their monthly interest payments by about 90%.

"Someone with an interest only mortgage of 150,000 and a rate equivalent to Bank Rate will have been paying 625 a month six months ago, and with today's decision they will now be paying just 62.50," he said.

Some of those whose trackers deals are set below base rate are now paying no interest at all.

But most mortgage borrowers are also savers - and savers, in total, far outnumber mortgage borrowers.

Dilemma

This highlights the increasing dilemma for banks and building societies - to pass on the latest cut or not, and if they do, by how much?

When the Bank of England started cutting back in October, both mortgage and savers' rates fell more or less in line, albeit after both the prime minister and the chancellor applied some heavy pressure on lenders to make sure that mortgage borrowers benefited.

After the February reduction, only 41% of lenders passed on any of it to their borrowers.

And only 14% - just 13 institutions - passed on the 0.5% cut in full to their borrowers on standard variable rates.

So the downward path for savings and mortgage rates has diverged, as lenders became more reluctant to pass on all of the Bank Rate cuts to their borrowers while still doing so for savers.

According to the financial information service Moneyfacts, after the first five successive rate cuts, the average standard variable rate was starting to level out at about 4.77%.

Meanwhile, the average variable savings rate, across all banks and building societies, continued to plummet and stood at just 0.96%.

"It is worrying that people who are relying on interest from hard-earned savings seem to have no alternative but to watch as providers collectively and progressively cut their savings rates," said Darren Cook of Moneyfacts.

"If new mortgage rates do not fall, there seems no incentive for people to negotiate a new deal or to look at climbing the property ladder in what is now a buyers' market," he added.

Bad idea?

If savings rates fall so low that people have no apparent incentive to save, this could choke off even further the supply of funds available to borrowers.

This was acknowledged by the Bank of England itself when it announced its sixth consecutive rate cut.

"The Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system, " said the Bank.

The Council of Mortgage Lenders (CML) said the Bank's latest cut presented "enormous challenges" for lenders.

"Savings are the lifeblood of mortgage lending, and unless lenders can offer competitive rates to savers their ability to offer new mortgages is restricted," said the CML's director general, Michael Coogan.

"National Savings and Investments this week reported record inflows of savings, sucking more money out of the mortgage market, so today's cut represents a double whammy for prospective mortgage borrowers," he added.



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