by Mark Johnston
A recent poll of economists found that the majority of them predicted the base rate of 0.5% would not rise this year and a handful of these also believed there would no rate increase until 2013.
Sir Mervyn King, governor of the bank of England stated that when there was an increase in the interest rate, there would be a delay in it feeding through to other borrowing costs.
With the bank of England base rate at 0.5%, this should bring joy to people who have borrowed, or want to borrow large sums of money, such as a mortgage. However recent surveys have shown that only 41% of lenders passed reductions on there borrowers.
The government has repeatedly urged banks to pass on base rate cuts. However although lower interest rates should mean cheaper mortgages until inter bank lending gets significantly cheaper mortgage rates will remain the same.
Some home owners have seen their monthly loan repayments slashed dramatically especially for those who have interest only mortgages. For example a borrower with on interest only mortgage of £150,000 and a rate equivalent to the banks rate will have paid up to £625 a month, a dramatic drop.
So what does the low base rate mean to borrowers finances?
Borrowers with a tracker mortgage will have automatically seen there rates reduced by 100 basis points, however many lenders put ‘collars’ on their deals which means that the rate will never fall below a certain level.
Borrowers with a fixed rate mortgage will have not seen any immediate difference within their deal as the rate they have set in stone for a pre-agreed period of time. Although hopefully the low base will enable banks to offer cheaper fixed rate deals in the very near future.
Pre credit crunch, home owners were always encouraged and advised to re-mortgage to a new more competitive deal rather than remain on a lenders standard variable rate (SVR), however due to the low base rate many borrowers are staying on their lenders standard variable rate (SVR). This is fine in the short term but in the long term the interest rates can only go one way.
Many lenders have already failed to reduce their standard variable rates (SVR), after November 2010 around 75% failed to pass reductions on in full.
Director General of the building society association, Adrian Coles says that “While low interest rates are good news for borrowers, they are not so good for savers”.
Savings are the lifeblood of most lenders and unless lenders can offer competitive rates to savers their ability to offer new mortgages is restricted stated the council of mortgage lenders director General, Michael Coogan
Savers have been disappointed with the news of the low base rate, especially if they save in building societies, which passed on these reductions as they have seen the interest paid to them at least halved in a very short period of time.
Although on the plus side, savers should remember that lower interest rates are designed to help the UK weather the recession.
Story link - How Base Rate, Cheaper Finance?
Related stories to : How Base Rate, Cheaper Finance?