Interest rate cut: 'The focus is rightly on help for borrowers'

Published on Friday 5 December 2008 09:30

THE news that interest rates have been cut to their lowest levels for almost 60 years will be welcomed by most, although the incentive to save is almost non-existent.

But yesterday's move by the Bank of England to reduce the base rate from three to two per cent will only bring relief to businesses and householders if the cuts are passed on in full. It is a relief that major lenders such as the Halifax, Lloyds and HSBC have already confirmed they will do so.

After months of uncertainty, this week has brought some much-needed breathing space. And no-one can accuse either the Government or the Bank of England for not making every effort to try and prop up the economy. After bailing out the banks, the focus is now rightly on helping borrowers and if the banks heed Gordon Brown's call to play ball and pass the savings on, households with a typical 150,000 mortgage will see their monthly repayments reduced by 85; or 142 on a 250,000 loan.

At a time when repossessions are rising across the country, the rate cut is a further boost in what has been a good week for restoring confidence, particularly in the housing market. And the base rate may yet fall further.

On Wednesday the government also revealed that it has negotiated a deal with eight major lenders controlling 70 per cent of the mortgage market to grant those struggling to keep up repayments a two-year mortgage holiday. Negotiations with the remainder of the market are continuing.

Agreement has already been reached with most lenders that they will not seek to repossess homes for a minimum of three months from those who fall behind with payments, and even then only as a last resort. The Royal Bank of Scotland gave further cheer to its customers by promising to defer such action for six months.

Such action is key in all sections of the market. It is not in anyone's interests to see a glut of empty homes with few potential buyers. Councils, which have a statutory obligation to house the homeless, do not have the luxury of the vast stocks they once controlled.

There are also signs that some banks are now seeking to offer more favourable rates to business customers reeling under the effects of the recession but too many are still being held to ransom. HBOS and Lloyds TSB has secured 250 million to provide loans to small companies and are guaranteeing not to increase overdraft charges for a year.

But yesterday's action by the Bank will not benefit everyone. After the collapse of Northern Rock eighteen months ago many borrowers were advised to take out fixed interest deals, many with punishing get-out clauses, and avoid trackers. Spare a thought for them – yesterday's base cut will bring them no relief at all.