Bank of England cuts base rate by 1.5%. But who will it help?

The Bank of England (BoE) cut the base rate of borrowing money by a staggering 1.5% to 3% in a bid to stimulate lending and as a result stimulate spending. Well, we’ll have to wait and see if that happens. The people that will benefit from this cut are those who have tracker mortgages since this will mean a possible cut in their interest rates and their repayments.

For some, the decrease in the repayments might mean the difference between being able to meet the repayments and having their homes repossessed.

The market had definitely expected a cut in the interest rate, but of about 0.5%, not 1.5%. So, who will benefit from the cut? Not many, especially after how the banks literally scrambled to withdraw most of their tracker mortgage deals. A tracker mortgage is one with a variable rate of interest, which is above the base rate of the Bank of England by a set percentage either for the whole period of the mortgage or a period of time. The benefit of this is that when the rate goes down, so does the interest rate, and vice-versa when the rate goes up. However, some tracker deals will not track the base rate after it falls to a certain level or a minimum level, which is known as a “collar”. Halifax, for example, has a “collar” of 3%, which means that a further cut will not be beneficial to its customers.

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This means that first time buyers who were planning to get on the property ladder will have to look elsewhere. Its already beginning to look like the cut in the base rate has failed to do one of the main things it was supposed to do- enable first time buyers to buy properties. If first time buyers are unable to buy properties, this will certainly come as a blow for the construction industry since it means that their properties will remain empty and they will have to impetus or money to build new properties.

So, why have the banks been so quick in withdrawing their tracker mortgages? To protect their other more profitable mortgage deals, of course. Banks charge interest on their mortgages based not on the BoE’s base rate, but on the LIBOR (London Inter Bank Offered Rate). That’s the rate at which banks lend and borrow from one another. While the base rate has been steadily coming down, the LIBOR has proved to be more sticky, hardly budging at all. According to the data from www.thisismoney.co.uk, the LIBOR for the past four weeks has been between 6.28% and 5.68%. Much above the Bank of England’s base rate.

This means that tracker mortgages have a smaller profit margin than the other deals due to the vast difference in the interest rates. Clearly, deals whose rate are based on the LIBOR are much more profitable for the banks and it should then come as no surprise that they are withdrawing the tracker mortgages.

Another group of people who are likely to lose out are those who depend on the income they get from the interest they get on their savings.

Many people were praying, and certainly many more were hoping for a cut in the interest rate to provide them with some respite in these difficult times. While the cut might be a boon for them, for others, not so much.


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