How consumers have been affected in different ways by the interest rate cuts

Between August 2006 and July 2007 the UK experienced a period of rising interest rates, with a succession of five 0.25% interest rate hikes, which took the base rate from 4.5% to 5.75% in under one year.

Between July 2007 and December 2007 the interest rate was kept on hold at 5.75%, leaving many borrowers struggling to keep up with higher mortgage repayments and resulting in an increased level of repossessions, as borrowers on variable rate mortgages failed to keep up with repayments on their loans.

Although the Bank of England is still nursing concerns over rising inflation, the slowdown in the economy fuelled by stretched affordability and low consumer confidence levels have resulted in the Bank of England cutting interest rates twice in the last three months, with an interest rate cut of 0.25% in December following the Monetary Policy Committee meeting, and a further rate cut in February of this year, which was also 0.25%. This took the base rate from 5.75% to 5.25% in the space of several months.

So, just how have the recent rate cuts affected consumers in the UK? Well, consumers have been affected in a number of different ways depending on their situation and their circumstances.

Some have benefited from the interest rate cuts, and have breathed a sigh of relief because it has eased the financial strain; however, others have suffered as a result of the interest rate cuts, and have found that their money is no longer working as hard for them. There are also those who have not been affected at all by the rate cuts.

Borrowers on variable rate mortgages

For borrowers on variable rate mortgages the interest rate has spelled good news. After nearly two years of struggling with rapidly rising and high interest rates, which has of course meant higher repayments, many homeowners have breathed a sigh of relief as the interest rate has come down and their repayments have fallen.

However, the benefits have been marred by the fact that many homeowners have also had to cope with rising energy costs, petrol prices, and food costs, which has counteracted the benefits of lower mortgage repayments.

Another downside is that whilst most major lenders have rushed to pass on the full rate cut to borrowers following the latest interest rate cut, many failed to pass on the full rate cut to struggling borrowers in December, which resulted in fierce criticism of the lenders in question.

Borrowers on fixed rate mortgages

For borrowers that have recently taken out fixed rate deals, or have longer term fixed rate deals in place, the interest rate cut has not have any real impact, other than possibly leaving some who took out their fixed rate deals before the first rate cut paying more than they would have been if on a variable rate.

However, there are also those that are on fixed rate mortgages that were taken out a couple of years ago when interest rates were low, and for these borrowers the two rate cuts does provide some relief, although it does not get them out of the woods completed.

This is because many people on cheap fixed rates took them out at under 4.5% originally, and until December last year faced the prospect of their interest rate soaring once the fixed rate period ended.

Although their interest rate is still likely to go up if their fixed rate period is due to end in the coming months, it will not be by as much as it would have been had the two interest rate cuts not been applied.

Savers

For savers the interest rate cuts have spelled bad news. This is because whilst many financial institutions are slow to pass on interest rate cuts to borrowers most act quickly when it comes to cutting the interest rate on savings, as this is their own favour.

Many savers have seen the interest rates slashed on their accounts, and new savers are unable to get the same sort of savings rate as they might have got a few months ago.

However, there are some savings accounts where the interest rates are still high, and with one savings account, from Icelandic bank Kaupthing Edge, the interest rate of 6.5% is to remain unchanged despite the latest rate cut. Savers are therefore advised to shop around and find a more competitive rate of interest for their savings if their own rate has been cut.

First time buyers

Affordability for first time buyers has been very difficult over recent years, with rising house prices and rising interest rates standing in their way.

However, house prices are now set to fall, which should increase affordability for first time buyers, and with two interest rate cuts and a number of further cuts expected over the course of this year an increasing number of first time buyers may find themselves in a position to get onto the property ladder.