The fact that the Bank of England (BOE) has slashed interest rates by 1.5% to 3%, I think shows how worried they are about the British economy. In a Bloomberg survey of 60 economists, nobody had predicted such a large cut in one go. You would be forgiven for wondering what the reasoning behind this decision is when inflation has reached over 5%, and the BoE are supposed to target 2%. However, the BOE are looking ahead 24 months, and the outlook for next year is very different with inflation expected to fall. In a recession, with a lower demand for goods and services, it normally points to lower inflation. It may even mean, if the downturn is especially severe, that we enter a period of deflation with falling prices. If this were to happen it is possible that base rates could go even lower. So, what does this mean to you? Mortgages The first thing we noticed the day after the announcement of the 3% base rate, is that the majority of lenders have withdrawn their tracker rates. These mortgages simply track the BoE base rate plus, for example, 1.7%. So if you are fortunate to have one of these, your new rate will be 4.7%! So on a £200,000 loan, a borrower will find that they will be saving £250 per month if it is an interest only loan. No doubt new rates will be released by lenders soon, but commentators are predicting that these new products will be at a significantly higher margin over the base rate. The lenders that have withdrawn tracker rates include Skipton Building Society, Woolwich, Cheltenham & Gloucester, Lloyds TSB, The Mortgage Works (a subsidiary of Nationwide), Alliance & Leicester, Nationwide & Abbey. Some lenders have even announced that not only are they withdrawing their tracker rates, they have no plans to replace them. These include Nationwide and Abbey. Good news comes from Lloyds TSB and Cheltenham & Gloucester. They have announced they will pass on the full 1.5% cut to borrowers on their Standard Variable Rate (SVR). Their SVR will be just 5% from December 1st. Of course, we don't know whether other lenders will follow Lloyds TSB's lead. In this climate we can't assume that the full 1.5% cut will be passed on. This is because the rate at which banks lend to each other (LIBOR) has not fallen in line with the BOE rate. Rates for Fixed Rate Mortgages should fall in the next few weeks/months, so it might be best to delay on opting for a fixed-rate deal unless you absolutely have to. Deposit Savings Clearly, savings rates will fall. If you have no debt to clear, then it is vital you seek out the best rates for your money. One option would be to find a fixed rate bond for your cash. There are some offers out there at over 6% still, but you are likely to find these are withdrawn very soon. So, what's to come? Well, who knows. Do you feel more confident today than you did a few days ago? After all, the governement and BoE want us to start spending in the shops again to kick start the economy and safeguard jobs. It will be interesting to see if interest rates are reduced further next month. Let's hope the medicine works. The Financial Tips Bottom Line Keep on top of your debts and deposit savings. Don't accept what the banks are offering you if you have the option of getting a better deal elsewhere. ACTION POINT If you have a mortgage, check with your lender exactly what the reduction in rates will mean to you. If they are not giving you a decent rate, consider remortgaging. If you are a saver, check and recheck to make sure you have a rate of return that you are happy with. Beware of the small print giving a good short term rate which then reduces after a short period of time. Visit the second website above to compare savings products or call us. Good luck.
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