Don't blow the rate cut on retail therapy

Despite the 0.25% reduction, our houses and finances aren't out of the woods. By Kate Hughes
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The Independent Online

The Bank of England's quarter-point reduction in interest rates to 5.5 per cent doesn't sound very much but the real effect will be felt over the next few months. A cut at this time of year is virtually unheard of because of the effect on Christmas spending; it clearly demonstrates concerns about housing and the economy as a whole.

"The decision reflects some warning signs of a slowdown, and in particular the drop in activity in the property market in recent weeks," says Nici Audhlam-Gardiner, head of mortgages at Abbey. "The rate cut will be a welcome start to 2008, easing the pressure on monthly mortgage payments. For those trying to get on to the property ladder, the prospect of buying a first home at last looks a little more affordable."

In reality, though, the jury will be out for some time on the effect of the cut. Some people may still shy away from what is clearly a floundering market, and we may not see any change in buyer sentiment for several months.

So how can you make the most of this small cut in rates now?

Lenders responded with surprising haste to the Bank's decision. Nationwide, the Halifax and First Direct have already dropped their standard variable rates by the full 0.25 per cent and others are expected to follow suit. But as with any rate change, borrowers will only really notice the difference as they come to the end of fixed- rate deals or tracker mortgages are adjusted, and that usually takes a few months.

David Kuo at advice website says borrowers should capitalise on the rate cut by carrying on as they were. "Currently, the repayments on a 25-year 200,000 mortgage at 6 per cent are 1,288 a month. This will drop to 1,258 after the quarter point reduction. But by maintaining repayments at the previous level, the length of the mortgage will be cut by 15 months, and the total interest bill will be slashed by 19,392."

And if you're thinking of switching your mortgage or a fixed-rate deal is nearing the end, then tracker mortgages which move in line with the Bank base rate could prove their worth, with more cuts expected.

However, Ray Boulger at broker John Charcol has a word of caution for people tempted to switch mortgage in the light of the rate cut: "There is now such a huge range of arrangement fees that it is vital to compare the true cost of deals, taking account of both the interest rate and the fees."

Consumers have also been urged to keep an eye on the banks, which tend to be quick to pass on rate cuts to savers but much slower to reduce mortgage charges.

However, golden opportunities for savers have arisen in the past few months, with some banks offering very tempting rates in order to boost their balance sheets in response to the credit crunch.

Kevin Mountford, head of savings at comparison site, says that in light of the forecasts of further rate cuts, savers ought to jump now. "If you can get 7 per cent interest fixed for 12 months, then do it.

"For easy access savings, the danger is that because they have variable rates, they could go down now. You may want to look for a product with an interest rate guarantee."

But the biggest message from experts is not to go on a seasonal spending spree, egged on by reduced mortgage rates. The worst, they say, may not be over.

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