What now for the UK's borrowers?

The Bank of England has cut the base rate of interest to five per cent, but what impact will the decision have on UK borrowers? – Christopher O'Toole takes a look.

The cut is the third in five months – following 0.25 per cent falls in December and February – which combined have seen the rate decrease from 5.75 per cent late last year to five per cent today.

But, despite the efforts of the monetary policy committee (MPC) the average rate of interest charged on a high street mortgage has continued to increase.

According to the Council of Mortgage Lenders (CML) the average interest charged on a fixed-rate mortgage had increased to 5.94 per cent in February - up from 5.34 per cent at the same time last year.

Coupled to this, research from MoneyExpert.com finds the average fixed mortgage application fees have risen by 55 per cent, from £532 to £827, since February 2006.

The trends have developed despite the efforts of the Bank to inject liquidity into the market, with the offer of wholesale finance at discounted rates to the markets, and the cuts in interest rates.

Behind the upward trend is the now infamous credit crunch.

With banks still sceptical about lending to each other, liquidity in the market has dried up, limiting available funds and thus the offers lenders are able to make to customers.

There are also suggestions some banks are taking advantage of the current instability to boost their profits by upping rates.

So, will today's new cut in interest rates have the desired impact on the market?

In the short-term it seems unlikely - liquidity is the real cause of high interest rates, and the MPC's decision has done little to alter this.

"We may not see all of the reduction passed onto new borrowers in the pricing of new mortgage products as lenders continue to manage their volumes, increase their margins and reduce their risk exposure," said Brian Murphy, head of lending at Mortgage Advice Bureau (MAB).

And, as Ray Boulger, of brokers John Charcol, points out, banks are under no obligation to cut their rates in line with those of the Bank of England.

"Many borrowers with a mortgage on, or linked to their lender’s standard variable standard variable rate (SVR), are likely to miss out on all or part of today’s Bank rate cut.

"Tracker margins aren’t coming down any time soon and so the only conclusion is that the spread between Bank rate and SVRs will widen," he added.

Charcol points out only last month Kent Reliance increased its SVR by 0.25 per cent, lustrating it is business realities and not the Bank of England which sets rates.

However, this could be the beginning of the Bank's policy to tackle the issue coming to fruition, argues the Royal Institution of Chartered Surveyors (Rics).

"The liquidity squeeze is most apparent in the housing market and while today's decision is unlikely to provide immediate relief for first-time buyers and homeowners seeking to refinance, this is part of a process which should ultimately help to bring down the cost of borrowing," said Rics chief economist, Simon Rubinsohn.

And at least one lender will be passing on the cut.

First Direct has already announced it is to cut the rate on its standard variable mortgage rate by 0.25 per cent from today - passing on the full benefit of the Bank's decision to customers.

The SVR from the direct bank will now be six per cent (6.2 per cent APR).

However, the announcement covers only the most expensive mortgages in the range, and leaves mainstream lending untouched.

Yet, the end of the credit crunch appears a long way distant yet.

Transaction volumes in the market have fallen by 40 per cent, according to John Charcol, and prices are also on a downward slide. Demand has also fallen as buyers sit on their hands waiting to see what happens.

As such the Bank's decision today is unlikely to have a significant impact on the market.