Awaiting the effects of the rate cut

Many borrowers breathed a sigh of relief on the 6th December as the Bank of England cut interest rates for the first time since August 2005. 2007 started with a squeeze for borrowers as a number of rate rises signalled higher mortgage repayments for trackers and variables, along with a jump in the cost of smaller credit such as personal loans and credit cards. However, the central bank saw the need to lower the base rate amid signs that the UK economy is slowing down. Conditions in November worsened as the effects of the worldwide credit crunch became more apparent, with a number of banks seeing their share price take a hit. This combined with a weakening consumer confidence and a slowdown in house prices gave an indication that the economy was coming to a turning point.

BBC economics editor Evan Davis explained, ‘At the outset, it should be said that whether things go well or not, the economy seems to have reached a turning point, with an end to an era of rising house prices, rising borrowing, strong consumer spending, a deteriorating trade deficit and relaxed bank attitudes to lending.’

Wavering consumer confidence and a housing slowdown may not sound like music to some people’s ears, but at least for first time buyers and people who come off their fixed rate mortgages in 2008 there is some good news. Michael Coogan, director general of the Council of Mortgage Lenders (CML) explained, "A reduction in interest rates is exactly what the market needs and will benefit consumers, this will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year." Meanwhile, the accountancy firm PWC had warned that thousands of people coming off their fixed rate mortgages next year would be hit by an extra £140 a month bill to their interest payments if they don’t refinance.

Many will certainly breathe easier in the knowledge that interest rates are likely to lower more in the coming year, but there are warnings that it might not have much effect on lenders. In November Standard Life put its rates higher on its standard variable rate (SVR), despite the Bank of England making no change during the month. However, those on a tracker mortgage, that is one that follows the central bank’s base rate, will be much happier after the cuts. Some lenders have also looked to cut rates, with both Halifax and Nationwide cutting interest rates on their SVR products in line with the move. Making succinct financial headway can be helped by sites like Beat That Quote, a consumer-friendly site that compares loans, mortgages and credit cards on the market.