The pros and cons of the base rate cuts

Between 2006 and early 2007 many people were horrified as a result of the base interest rate increases which saw the base rate rise from 4.5 percent to 5.75 percent. Borrowers and homeowners found that their financial commitments went up considerably, although the rate increases came as far better news for other groups such as savers, who hoped to get better returns on their money as a result of the rate increases.

However, from the end of 2007 onwards interest rates have been cut, and a series of rate cuts – particularly between October of 2008 and March of this year – have resulted in the base rate falling to the lowest level in the history of the Bank of England, standing at just 0.5 percent.

For many borrowers this has come as good news, as their mortgage and borrowing repayments have fallen considerably leaving them with far more money in their pockets each month. However, the base rate cuts have affected different people in different ways, and whilst many people have indeed benefited from the cut in the base interest rate there are also many that have suffered as a result of these rate cuts.

Borrowers and homeowners are the obvious winners in this situation, as the base rate cuts have resulted in many enjoying far lower repayments on their borrowing, resulting in savings of hundreds of pounds a month for some people. Of course, the level of benefit depends on the type of mortgage that the person has, as those with mortgages just as fixed rate deals will not have benefited whereas those with variable rate and tracker mortgages should have seen their repayments come down considerably over the past six months providing their lenders have reduced their rates in line with the Bank of England cuts.

However, savers are a different matter, as many have suddenly found that they are earning little to nothing in terms of returns their savings, which for many has resulted in huge losses in interest each year. For many there is little point in even putting their hard earned cash into a bank or building society given the abysmal returns on offer, and this is something that will also affect lenders, as most rely on their savings deposits to fund their lending operations.

One industry official said: ‘Savers are the sacrificial lambs in the Bank’s attempts to revive the economy. Anyone on a flexible savings rate might as well put the cash in the attic for all the difference it’ll make.’

Another group that has been severely affected by the cut in interest rates is pensioners. Many pensioners have learned to rely on the interest that is paid on their life savings to fund their day to day living.

However, with the base rate now at the lowest level in the three hundred and fifteen year history of the Bank of England, many pensioners are at their wits end with regards to how they will generate any income because the level of return on their life savings has plummeted to the point where they cannot live off their savings interest any longer.

Tags: bank of england, savings, interest rates, Mortgages, Loans, base rate