The most recent cut to interest rates will be the third in just a few short months. The Bank of England?s Monetary Policy Committee is working to stabilise the UK economy by cutting the interest rate by one percent, to the new low of 2%. The rate is the lowest since 1951.
The UK economy has been creeping deeper into a recession, and the hope is the new rate cut will help to once again stimulate the economy. This cut comes as no surprise to business leaders and economists; in fact recently many had been calling for further rate cuts. However, the rate cut to 2% is greater than what was expected.
On top of the recent slash to UK interest rates, policy maker for the Bank of England David Blanchflower has announced he will be stepping down. Blanchflower is a member of the interest-rate setting committee for the Bank of England. He expressed on December 10 that he will be stepping down when he will not return to the committee when his term expires on May 31, 2009. In additional news regarding the Bank of England, Paul Tucker will take over as Deputy Governor for Financial Stability from John Gieve. Gieve is planning to step down in March, and Tucker will take over the important role of overseeing the banking sector.
Speculation is that UK interest rates will continue to drop into the new year, reaching a potential low of 1% by early 2009. These cuts will greatly affect borrowers and lenders in the midst of the current mortgage crisis, if these rates are indeed passed on to the mortgage borrowers.
Most lenders have been putting pressure on the UK Government to lower the standard variable interest rates. However, costs to lenders still remain high, and lower interest rates could potentially cause further damage to these lenders, as profit could plummet even more.
Many lenders have passed on the benefit of these rate cuts to their mortgage borrowers, while others have not. HSBC is an example of a lender who passed on a portion of the 1.5% rate cut from last month, lowering the standard variable rate from 6.25% to 5.44%.
Tracker mortgage rates have potentially reached their lowest standard variable rate already. There is a certain cap beneath which the tracker rate will not fall. Halifax, for example, has set their rate at 3%, while Nationwide has set their rate at 2.75%.
Borrowers who are able to reap the benefits of the 1% rate cut could potentially see savings of £86 each month on a £150,000 mortgage with a 25-year term. Those who have fixed rate mortgages will, however, not see any difference in their monthly payments unless they decide to remortgage with a new lender who offers decreased rates.
It is true, though, that the best deals for mortgage or remortgage will be reserved for those who have large levels of equity in their home, or large deposits. Those who are first-time buyers that only have a small deposit to make will still find it difficult to find a good mortgage deal, as the UK is still deep in the mortgage crisis.
With respect to the mortgage crisis, prices of UK homes are still falling. Sources such as Halifax say that prices have dropped by 14.9% in the last 12 months.