Yesterday's 1.5 percent cut in the Bank of England interest rate will mean at least one in four mortgage borrowers will make a substantial saving. Borrowers with a tracker mortgage will feel the full benefit from as early as next month, however, it may take much longer before any beneficial effects are felt by many others.
Tracker mortgages Directly tracking any movement in the Bank of England rate, borrower's rates will come down by a full 1.5 percent with immediate effect. Most tracker mortgages are currently priced between 5 and 6 percent, so some homeowners would see a drop of nearly a third. An average family with a 200,000 repayment mortgage, currently paying 5.5 percent on a tracker loan, would see their monthly payments fall about 170 a month.
However, some lenders such as the Nationwide and Skipton have "collars" meaning the Bank rate is not followed once it falls below a certain level. For Nationwide this is 2.75 per cent and 3 per cent for Skipton. For new borrowers trackers are not good value. With many banks withdrawing trackers altogether this week, others are charging 1.5 or more percent above the base rate.
When banks lend to each other, the rate is known as Libor. Well above the Bank rate, banks use Libor to price their lending rates. If the Libor does not come down then some new borrowers will be required to pay two per cent above the bank rate.
Fixed-rate mortgages
For new borrowers fixed rates are coming down, but the best ones are still well over five percent. Homeowners who are on fixed rate deals now will see no change and when they come to remortgage they may not find a better deal than their current one.
Discount mortgages
These track the lender's standard variable rate (SVRs). SVRs have not been coming down as quick as the Bank of England rate. About half of the lenders have cut their SVR since last month's 0.5 per cent base rate cut it remains to be seen how lenders react to the latest Bank cut.
Remortgage before the end of your current deal or you will end up paying the SVR. Only a small amount of borrowers pay the SVR, which is at least 1.5 per cent above the base rate. With falling house prices though, people are having less equity in their homes, remortgaging is difficult and they end up paying the SVR.
Savings
High rates, some paying well over six percent, are still been offered by banks to attract private individuals. It is difficult to raise the capital they need from other banks.
Business and investment
Finishing almost six per cent down, the stock markets were unconvinced by yesterday's cuts.
Businesses have the same lending criteria as private individuals, only being able to borrow from the banks and not the Bank of England. Refinancing their debt is still expensive while the Libor remains high. In time rate cuts should work.
The stock market instability is daunting for private investors. For the average investor, put some of your savings into your pension each month. Eventually, markets will recover.
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