Just a few months after interest rates in the US fell to record lows, rates here in the UK have also fallen. The base rate of interest set by the Bank of England now stands at it's lowest level in living memory. The rate has been lowered in an attempt to kick start the economy and get people spending again. If the measure fails then the UK economy may be unable to avoid a seriously damaging recession.

By reducing interest rates the Government (and the central Bank) are hoping that people will feel more comfortable about their finances and go out and spend. The plan is that mortgages, loans and credit card interest payments will all reduce putting more cash in people's pockets.

Those most likely to feel the impact of these rate reductions are borrowers with tracker mortgages. These mortgages charge an interest rate that tracks the Bank of England base rate. If the base rate increases then they become more expensive and if the base rate falls they become cheaper. Well we have certainly seen some big falls recently. From its level of 5.5 per cent at the start of 2008, the base rate has since been cut six times and now stands at just 1.5 per cent.

Anyone with a tracker mortgage that has followed all of those cuts will have seen the interest portion of their monthly repayments drop by 75 per cent. For borrowers on interest-only tracker mortgages these rates cuts will have had highly significant effects on the amount they repay to their mortgage company each month. What matters to the Government though is what they do with all that available cash. Ideally it wants them to go out and spend it, but many will either save it or use it to increase the capital repayments they make on their outstanding mortgage balance.

Of course not every tracker mortgage has fallen in line with each of those six interest rate cuts. Some trackers have what is known as a collar. This is a rate of interest below which the mortgage cannot fall. It effectively guarantees the mortgage lender a certain level of repayment. However in a highly unexpected move the Nationwide decided to ignore the collar clause on its mortgage following the December rate cut and allowed some of its tracker mortgages to fall below their contractual minimum charge.

Return to Mortgage News index