At 0.5% the Bank of England base rate is already at a historical low, but the International Monetary Fund (IMF) has suggested further cuts could be needed to boost the UK economy. The news comes as mortgage rates have started to edge up, driven by problems in the eurozone, and savings rates have begun to fall. So would a base rate of 0% make any difference to consumers?
Existing mortgages
Some consumers would definitely benefit from a cut in interest rates. "If you are on a tracker rate your repayments would fall, unless that rate is collared – as a number will be," says David Hollingworth of mortgage brokers London & Country. A collar is a restriction on how low the interest rate on a mortgage can go, and if there is one it will be spelled out in the terms and conditions of your mortgage. If there isn't one, any cut in the base rate will definitely translate to lower mortgage payments.
Lenders are not, however, likely to reduce their standard variable rates (SVR) in line with any cut. Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "One suspects many lenders would simply absorb the benefit of any rate cut, using it to improve their margins, rather than pass it on to borrowers."
He points out that while rates have remained unchanged, several lenders including Halifax, Clydesdale and Yorkshire banks have actually increased their SVRs in the past few weeks.
Halifax has a term in some of its mortgages pegging the SVR to the base rate – this applies to loans taken out before September 2007. However, it recently changed the margin and is committed to charging 3.75% above the base rate, and it could do so again.
Customers of Nationwide's base mortgage rate, however, would see a reduction. The rate is guaranteed to be no more than 2% above the base rate – if the latter fell to 0% borrowers would pay just 2% for their loans. For a customer with 15 years left on a repayment mortgage worth £100,000, monthly payments would fall by £23 to £643.
New mortgages
Hollingworth and Harris are both sceptical that a lower base rate would lead to a rash of new best-buy mortgages. Hollingworth says lenders will be looking at how much it costs to fund their loans rather than the base rate, and this will determine how much they charge.
Harris adds: "Even if interest rates were to fall, it is questionable whether this would have a significant impact on the pricing of new mortgages when many lenders simply don't have much of an appetite for lending at the moment."
Hollingworth suggests anyone taking out a new loan who thinks rates might fall looks at a tracker and checks the terms and conditions. "Just check there is not a collar on it – some lenders have them saying the rate won't drop below the current pay rate. If you're hoping the base rate will fall make sure you're not kicking yourself because you didn't read the small print," he says.
Savings
"Once again it would be the savers who got the raw deal," says Andrew Hagger of comparison website Moneynet. He says any cut could filter through to changes in instant access and variable rate savings accounts, which are already paying peanuts. Anna Bowes of Savings Champion agrees: "I would be very surprised if a cut did not mean that lots of providers felt able to drop savings rates further."
Fixed-rate savings bonds have increasingly been topping the best-buy tables in the past few years. Savers who have locked in to one of these would obviously not see their rates cut, but rates on new bonds might fall if it looked as though very low interest rates were here to stay.
Bowes says the IMF's suggestion that national insurance also be cut to stimulate growth would be no consolation to savers who are pensioners. "Pensioners do not pay national insurance because they are not working – they would not get any of the gain and all of the downside."
Credit cards and loans
Hagger says it is unlikely that cutting the base rate to 0% would lead to a fall in the rates paid on credit cards and personal loans. Figures from the Bank of England show average rates paid on credit cards and overdrafts have actually gone up since the start of January 2008 when the base rate was 5.5%, so borrowers with unsecured debts seem unlikely to benefit from a rate cut.
