Q&A: Interest rate guide

I’m a homeowner will I benefit from the cut?

About 50 per cent of existing mortgages are fixed rate deals which will not benefit from the cut, 40 per cent are tracker rates which will track the base rate down, and 10 per cent are variable rates so will only fall if the lender decides to pass on the cut. In terms of house prices economists predict that sentiment in the housing market should start to improve as conditions in the credit markets are eased.

I’m hoping to buy a house, what should I do as a new borrower?

New customers will have to wait to see whether the Bank rate change will affect the cost of new home loans. Since the decision, major lenders such as HBOS, Abbey, Alliance and Leicester, Barclays and HSBC have said their variable rates are ”under review”. Nationwide, the UK’s biggest building society, said it was ”monitoring the markets” before making a decision.

Ray Boulger of John Charcol, the UK’s leading independent mortgage adviser, says trackers, ideally with a droplock option (which is the ability to transfer to a fixed at any point) remain the ideal mortgage product in today’s market. But he says it is increasingly difficult, especially for borrowers needing in excess of 75 per cent loan to value, to find one at a respectable margin over Bank Rate.

“Lenders are competing to see who can increase the margin over Bank Rate the most, or worse still withdraw their trackers completely,” he says. “Several have been withdrawn this week, with lenders waiting for today’s rate decision before deciding how much to increase their trackers by.”

Is this the end of the good times for savers?

The best savings rates have remained alluringly high at about 6.5 per cent for instant access accounts and 7 per cent on fixed-rate bonds pretty-much throughout the credit crisis, despite a series of base rate cuts over the past year. But the latest super-sized reduction may well prove a rate cut too far for savers.

Most banks and building societies are likely to take some time before detailing how their rates will change, although a range of fixed rate bonds paying 6 per cent or more were quickly withdrawn yesterday.

Coming weeks could see most accounts come down substantially. Some reductions could be phased, according to Moneysupermarket.com, the comparison service, starting with a half a percentage point cut.

However, while most existing accountholders are likely to face hefty rate cuts, banks and societies are also likely to continue to launch competitive new deals to keep attracting new money.

What are best rates still available?

As of yesterday evening, savers could still lock in to one-year fixed rates as high as 7.1 per cent – from Icici, the Indian-owned bank, according to Moneyfacts.co.uk, a comparison service. The next highest rate, 7.05 per cent, was also from a foreign-owned bank – Anglo Irish. UK institutions were already paying lower rates, and many of the best fixed rates may change very quickly. Savers who can afford to tie up their money should move quickly to catch the best return, say experts.

The top variable rates – which can be expected to fall in coming weeks – are 6.5 per cent from Capital One Savings and 6.4 per cent from Birmingham Midshires.

What does it mean for equities?

Advisers welcome the interest rate cut as they believe it will help to restore liquidity in the credit markets and improve the economy in the near term. But they remain pessimistic about UK equities as they believe markets will remain volatile until the earnings of corporations show signs of improvement.

They are encouraging clients to investigate US equities on the view that the market there will recover from a recession ahead of the UK and the Eurozone.

But the cut is likely to help restore liquidity in the credit markets and help improve the economic outlook in the short-term. In the long-term, the rate cut is likely to help boost the profitability of companies with high levels of borrowing and should help sectors such as housing and retailing.

What about the value of the pound, should I book a trip abroad?

In normal circumstances, a currency is expected to suffer if the Bank of England or Central Bank cuts interest rates as it makes that currency less attractive to institutional investors searching for yield. However, in the current environment, this correlation has broken down and Central Banks who do not cut interest rates are seeing their currencies punished on the assumption that it will take longer for their economy to recover. “We’re in a highly unprecedented and unpredictable moment”, said Marc Cogliatti, currency strategist at HiFX.

A huge rate cut should have weakened the Sterling against the dollar. But while there was pressure to sell this afternoon – bringing the the Sterling down to 1.57 against the greenback – subsequent trading saw the pound climb up again, to 1.60, to eventually settle back to its pre-cut rate of 1.585.

For European travellers, however, the cut should mean a few more pounds in your pocket. Against the Euro the pound weakened marginally and is expected to continue this downward trend going forward.