BBC News UK Edition
 You are in: Business  
News Front Page
N Ireland
Market Data
Your Money
Fact Files
Talking Point
Country Profiles
In Depth
BBC Sport
BBC Weather
Wednesday, 12 February, 2003, 19:00 GMT
How low interest rates affect you

During the first half of 2002, the Bank of England interest rate has been stuck at 4%. It has not been that low for almost 40 years. BBC News Online's personal finance reporter Sarah Toyne examines how ordinary savers and borrowers will fare.

What happens to mortgages?

During 2001, interest rates fell from 6% to 4% in a series of seven rate cuts.

Somebody on a 100,000 interest-only mortgage who has benefited from the full 2% cut will now be 166.67 better off each month, according to mortgage broker, Charcol..

That is the equivalent of saving 2,000 each year.

The cuts should be welcomed by anyone on a standard variable rate mortgage, tracker or discount deal as these type of deals are tied to base rate fluctuations.

But if you are on a fixed rate, you will not benefit from the cuts.

When will my repayments reduce?

Whether your repayments will reduce immediately will depend on the generosity of your mortgage lender.

Halifax and Intelligent Finance, both from the same stable, have previously responded within seconds of the Bank's interest rate decisions to say they would match the cuts.

In general, such lightening speed is pretty unusual.

Most banks and building societies typically respond to a base rate cut with the announcement that they will cut savings rates.

This is because they must pay interest to savers, while they collect it from borrowers.

Will I notice a difference straight away?

Even if your lender has cut your rate, you may not notice any difference for some time.

One factor to consider is if you pay for your mortgage via "annual review".

If you pay under "annual review", your monthly payments are calculated once a year.

The bank won't cut my mortgage rate?

As the rate cuts have intensified, a number of banks and building societies have said they would not pass on the full quarter point cut to mortgage holders because they wanted to protect their savers.

This argument is often backed up with a statistic that there are seven times as many savers as borrowers.

This statistic neglects the fact that many people have more tied-up in debt than in savings and that many banks will be paying as low as 0.1% on savings accounts.

As Paula John, editor of Your Mortgage magazine, says: "The argument (presented by some lenders after the cuts in October) that they have to look after their savers is spurious given that the average instant access account pays less than 1% interest."

What about savers?

A cut in base rate usually means less income for savers.

Those most likely to suffer from a base rate cut are people who rely on fixed incomes, such as pensioners.

Savers who have signed up for high-interest internet savings accounts will also feel the pinch.

Will I pay less on my credit card?

While it is standard practice for mortgage lenders to move their rates in line with base rate changes, other credit providers do not yet respond in this way - although there is growing pressure on lenders to do so.

This means that if you have an overdraft, credit card or store card you are unlikely to benefit from cuts - unless you switch to a better deal.

There are some cheap credit card rates on the market, but there are also some extortionate cards which charge up to 30% interest - 30 times the cheapest ones.

Money saving tips

Need help?
See also:

12 Feb 03 | Business
Internet links:

The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.

 E-mail this story to a friend

Links to more Business stories

© BBC ^^ Back to top

News Front Page | World | UK | England | N Ireland | Scotland | Wales |
Politics | Business | Entertainment | Science/Nature | Technology |
Health | Education | Talking Point | Country Profiles | In Depth |