Rates held at 0.5% and homeowners finally get to feel benefits

Published on Thursday 9 April 2009 22:23

HOMEOWNERS are beginning to benefit from cheaper fixed-rate mortgages as a result of interest rates being at a historic low.

Figures released yesterday by the Bank of England showed that average interest rates paid on two-year fixed deals for people with a 25 per cent deposit had fallen from 4.35 per cent in February to 4.01 per cent last month – the lowest for five-and-a-half years.

The Bank's monetary policy committee (MPC) yesterday kept its base lending rate at 0.5 per cent. There have been repeated complaints that lenders have not passed on successive base-rate cuts, which have seen the rate fall from 5 per cent last October.

Just over half of Britain's 11.8 million mortgages are on fixed rates, which are unaffected by base rate changes. But yesterday's figures show cheaper fixed deals are now available for homeowners looking to take out a new mortgage.

Variable rate deals are at their cheapest for 14 years and stand at 4.03 per cent last month.

However, savers receive little return on their deposits – the average interest on a tax-free ISA account was a mere 0.63 per cent last month. Last October it was 4.36 per cent.

The Bank said its strategy of "quantitative easing" (QE) – or buying up government debts from banks to effectively "print money" and increase the amount of currency in circulation – was continuing. It has injected 26.4 billion, just over a third of a planned 75 billion.

The Bank has resorted to QE because its usual measure of stimulating the economy – cutting interest rates – is no longer an option.

IHS Global Insight economist Howard Archer said that interest rates could be held at record lows "well into 2010".

He added: "QE is clearly now at the forefront of the Bank of England's attempts to stimulate economic recovery, not only because the Bank rate has fallen as low as it can effectively go, but also because the lack of availability of credit is a serious threat to recovery prospects."