Will homeowners see any benefit from the rate cuts?

After a series of interest rate hikes between August 2006 and July 2007, which left many homeowners struggling to keep up with mortgage repayments because of the higher interest rates from banks, many were relieved to see interest rates plummet over recent months. In October of this year the Bank of England reduced the base rate from 5 percent top 4.5 percent, and a month later the central bank wiped another 1.5 percent off the base rate, taking it to just 3 percent. In December yet another 1 percent came off, which took the base rate to a fifty seven year low of just 2 percent.

However, whilst this is considered great news by many homeowners and campaigners, there is a chance that many homeowners will not actually benefit from these rate cuts simply because the banks are not passing them on to borrowers. The Chancellor of the Exchequer, Alistair Darling, and the Prime Minister, Gordon Brown, have both urged banks to pass on the rate cuts, so that the reduced repayments will leave consumers with more cash, thus helping to boost the economy. However, it seems that only a percentage of banks are willing to pass on the rate cuts, which has caused outrage amongst many.

In fact, in addition to doing little for many borrowers whose banks have failed to pass on the interest rate cuts the base rate reduction has also harmed savers. This is because many lenders have failed to apply all or any of the base rate cut on borrowing but have been quick to apply the reduced base rate on savings, which means those with savings and loans have been hit twice, by still having to pay high rates on their borrowing but receiving far lower rates of interest on their savings.

The government decided to take aggressive action with regards to reducing the base rate in response to the impending recession, flagging economy, slowing property market, and low consumer confidence levels. The idea was that a reduction in the base rate would result in a reduction in the repayments that homeowners were having to make once the interest rates had been cut by banks. This extra money that households had would then be spent on making purchases, which would in turn boost the economy and ensure that the recession was not as deep and long as it may otherwise be.

However, some banks have not passed on the base rate even though senior government officials have urged them to do so, which could seriously hamper the efforts of the government to improve the economy. In addition to this, many of those that have seen their mortgage rates reduced have said that they will not be spending the money but will be putting it aside in savings, as they have learned from the past year, which has been particularly difficult financially, that they need to have some cash put aside.

Tags: mortgage rates, market, chancellor of the exchequer, property market, great news, Savings and loan association