Will consumers benefit from the interest rate cut?
December 12, 2007
Following the Monetary Policy Committee meeting on 6th December the Bank of England made the announcement that many industry officials and consumers had been waiting for – interest rates had been cut.
Although the base rate has only been cut by 0.25% many consumers could see their repayments fall by a significant amount, which is particularly welcome news at this time of year. But will everyone benefit from the cut in interest rates?
Those on base rate tracker mortgages will enjoy the benefit of the rate cut with immediate effect, because the mortgage rate on their loans follows movement in the base rate. A number of major lenders, including Halifax, Nationwide, and First Direct, have already applied the interest rate cut to their mortgages, with new borrowers benefiting from the lower rate of interest with immediate effect, and in most cases existing borrowers enjoying the lower rate of interest from the beginning of January.
However, those that will not benefit are those on fixed rate deals, as the rate on these mortgages is fixed for a set period of time and therefore any fluctuation in the base rate, whether upward or downward, will not affect the repayments or interest rates tied to an active fixed rate deal. There is also some concern that some lenders will not pass on the full interest rate cut to borrowers, which means that although the Bank of England has cut the base rate by a quarter point not all borrowers will see this reflected in their mortgage rate.
Another downside to the interest rate cut is for those that have savings accounts. One of the silver linings with the recent series of interest rate hikes was that savers enjoyed increased interest rates on their deposits, so could make their money work harder for them. However, now that interest rates have fallen the tables have turned and it is now borrowers that are set to feel the benefits in terms of their interest rates and monthly mortgage repayments.
However, consumers should not get too comfortable too quickly. Although the interest rate has fallen, and according to experts will continue to fall over the next year, British Gas recently announced that from January its energy usage prices will be rising, in some cases by 10-15%. It is thought that other major energy suppliers will quickly follow suit, with high oil prices and increased costs on wholesale energy forcing utilities providers to increase their rates.
This means that although many homeowners on variable rate mortgages will see their monthly repayments come down due to the fall in the base rate, many will also see the cost of energy usage rise, and as a result of this could find that they are actually no better off than they were before the interest rate cut. As a result of rising energy prices it is estimates that the average household will be spending around £1000 a year on energy usage, and many could find themselves facing fuel poverty.
Alan Wright
11th December 2007
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