Rate cuts and the mortgage market

The Bank of England has cut its main interest rate.

It has gone down by 0.25 of a percentage point to 5.0%.

The decision comes as mortgage lending has begun to dry up under the impact of the credit crunch in the financial markets.

How will this latest move by the Bank affect borrowers and savers?

Will mortgage rates now fall?

Usually, lenders pass on most or all of any cut in base rates to their customers, and to both borrowers and savers.

This was the case with the past two rates cuts in December and February when the biggest lenders, such as the Halifax, Nationwide and the Abbey, led the way.

And it is happening again this time.

Within minutes of the Bank's decision, the Halifax, Nationwide, Woolwich and Cheltenham & Gloucester all said they would pass on the quarter-point cut in full.

This will feed directly through to what lenders call their standard variable rates (SVR).

Statistics from the Bank of England show that the average SVR of all UK banks and building societies dropped from 7.68% at the end of December to 7.24% at the end of March.

That average will now drop further.

So why have some mortgages become more expensive in the past few weeks?

Once upon a time, lenders offered mortgages at only their SVR.

But in the past 20 years, the market has become much more sophisticated, with many deals at fixed, discounted, tracker and capped rates now on offer.

However, a lot of the money to finance these comes not from lending out savers' money, but from borrowing from other lenders in the financial markets.

There, the credit crunch has been driving up the cost of borrowing money, in defiance of the Bank of England's attempts to bring it down.

The result has been that the interest rates on new fixed-rate and tracker deals, the most popular options for new borrowers, have been going up in recent weeks.

The one group who will benefit the most are those people who already have a base-rate tracker, as their interest rates will automatically fall.

What about other types of borrowing?

Do not expect your credit card or bank loan charges to fall automatically.

These appear to live in a world of their own.

Credit card companies, in particular, charge as much as they can get away with.

This leads to a huge margin between the Bank of England's base rate and the credit card rate charged to the customers.

Will this affect the deposit I may have to put down for a new mortgage?

Just as the credit crunch is pushing up interest rates for certain types of mortgage, so it is forcing lenders to ration their lending by other means.

In the space of just a few weeks, all lenders have abandoned the deals which saw them prepared to lend at 100% or more of a property's value.

Now, demands for a minimum 10% deposit are commonplace and some mortgage brokers expect a 15% deposit to become the norm quite soon.

This will affect more than just the few remaining people who are able to buy a home for the first time.

Anyone whose mortgage deal is expiring may find they do not have enough equity in their home to qualify for a sufficiently large deposit to get another special deal.

They will not be evicted from their homes, but they will simply have to pay at their lender's current SVR.

Although that has been coming down, it will still be higher than the other deals on offer, so many people can expect to see their mortgage payments rise.

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