Can Base Rate really go any lower?

A recent IMF (International Monetary Fund) report suggested that the Bank of England should consider taking further measures to encourage growth in the UK economy.  Possible actions for consideration by the Bank included an increase in Quantitative Easing and a cut of the Bank of England Base Rate.

That raises the question of whether the Bank will decide a rate cut is an appropriate course of action and if so what difference it might make to mortgage borrowers.  Base rate is already at a record low of 0.50% and has been for more than three years now.  This prolonged period of low interest rates has been of real value to many borrowers with variable rate mortgages, as their mortgage payments dropped and then stayed at this low level.

The biggest winners have been those with Base Rate tracker deals, especially those with one of the very low lifetime trackers available before the credit crisis blew up.  However there are some tracker deals that will not fall, no matter what happens to Base Rate, as the lender has placed a minimum rate or ‘collar’ on the deal.

Lenders such as Skipton BS and Yorkshire BS have imposed collars on their tracker deals so that the minimum rate is equivalent to the current rate.  A decision to cut Base Rate would therefore have no impact on the customer’s interest rate.

Most tracker borrowers will however be in a better position than those with a standard variable rate (SVR).  There would have to be major question marks over how likely lenders will choose to cut their SVR.  Already we have seen a number take exactly the opposite course of action, increasing the SVR despite no movement in the Base Rate.

Given the doubt around just how much benefit might be passed on to borrowers, the focus is more likely to be on how negative an impact it could have on savers.  They are the ones that have been hit hard by the lengthy period of a low Base Rate and could suffer again if the Bank was to trim interest rates further.

 

 

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