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When the news was announced last Thursday that interest rates were going to be cut by 1.5 per cent, everyone in The Observer office perked up. 'Great, lower mortgage rates and maybe some money left in our pockets at the end of the month,' was our instant reaction.
But sadly, the reality is likely to be very different for most people in the UK. In fact, unless you are a homeowner lucky enough to have a tracker mortgage that is set to run for another couple of years at least, you are likely to be worse off.
Savings rates are set to plummet, and savers will need to be careful they are actually earning enough to exceed, or at least match, the rate of inflation - currently 5 per cent - to make sure their cash is not eroded.
This does not mean you should give up saving. Now is not the time to go shopping, and you may have to make some difficult decisions about discretionary spending. With unemployment rates already going up and likely to soar next year, everyone should do as much as they can to build up a safety net in case of redundancy. The rule is a savings pot worth three months' salary, or three months' outgoings, whichever is higher.
To make sure your money is absolutely safe, stick to UK banks and keep the amount of money you have deposited with any one banking group - or licence, if the group has more than one - to £50,000 or less. This will ensure your savings are covered by the UK's Financial Services Compensation Scheme. To find out which banks share a licence, visit guardian.co.uk/money and click on the savings checker.
If you have any money that you won't need easy access to, you may want to consider using it to reduce your outstanding debt, especially if you can't find a savings account that pays more in net interest (assuming you are a taxpayer) than you are paying for your debt.
The one thing you might want to spend more money on is insurance to cover your mortgage, and possibly other debts, in the event of redundancy. Make sure you shop around for a policy that suits your circumstances though; these policies are notorious for small print that allows them to wriggle out of paying claims. Check out the terms and costs online at websites such as Moneysupermarket.com.
Finally, if you are approaching retirement age, and intending to buy an annuity with your pension fund, do it now if you can. Annuity rates are likely to tumble in the short term, as falling interest rates drive gilt yields (on which annuities are based) down, according to Tom McPhail of independent financial adviser Hargreaves Lansdown.
Here, Cash looks at the implications of the base rate cut for the groups of people most affected - mortgage borrowers, savers and pensioners - and what they can do to improve their position.
Mortgages
Banks' and building societies' reaction last week showed that they are still not prepared to resume normal business. Just five lenders - Lloyds TSB, Abbey, Nationwide, Halifax, and Bradford & Bingley - passed on the cut through their standard variable rate, the default rate for borrowers coming to the end of a special deal. More are likely to follow; HSBC, for example, is expected to pass on some, but not all, of the 1.5 per cent.
Some 10 per cent of UK mortgage borrowers are on their lender's standard variable rate (SVR) and will be hoping for a change in attitude over this weekend.
More worrying was the almost total withdrawal of tracker mortgages from the market. Many lenders, including Northern Rock, Lloyds TSB and its C&G mortgage subsidiary, Alliance & Leicester, and Barclays and its Woolwich mortgage arm, anticipated the cut by withdrawing their existing tracker mortgage ranges earlier in the week, followed by Nationwide after the announcement.
When Abbey withdrew its range last Tuesday, it used the opportunity to tighten its lending criteria, now requiring anyone wanting a tracker mortgage to have a deposit of at least 25 per cent of their home's value. Other lenders may do the same when they introduce new ranges of mortgages this week, making it very hard, if not impossible, for first-time buyers to take out a mortgage, or for those who have owned for just a couple of years to remortgage.
Melanie Bien, of mortgage broker Savills Private Finance, says: 'We need first-time buyers back in the market, but they just can't afford it.'
The new ranges of tracker loans will have higher margins - that is, the amount above base rate charged by the lender. This is because that margin is linked to Libor (the rate at which banks lend to each other), which reduced by just 1.06 per cent on Friday to 4.49 per cent, widening the gap between it and the bank base rate.
According to David Hollingworth of London & Country Mortgages, the best tracker rate - and possibly the only one left on the market this weekend - is from HSBC, set at 0.99 per cent above base for the life of the mortgage (taking the rate to 3.99 per cent), with a £799 application fee and no early redemption charges.
Bien says trackers will still offer the best value, as rates are expected to go still lower, with some pundits predicting a 1 per cent base rate. But she warns: 'Borrowers need to be careful which tracker they choose. Some lenders have included a "collar" in the product terms which means the interest rate cannot fall below a set level.' These include Skipton, Yorkshire and Norwich & Peterborough building societies, all with 3 per cent collars, and Nationwide, which had a 2.75 per cent collar.
The low base rate makes fixed-rate loans look very unattractive but, for those needing 60 per cent loan-to-value (LVR) or less, the Woolwich is offering mortgages that are fixed at 4.99 per cent for two years, with an application fee of £995. At 75 per cent LTV, Northern Rock is charging 5.35 per cent for two years with a £1,995 fee, and at 90 per cent LTV, the Nationwide has loans fixed for three years at 6.59 per cent, with a £299 fee for first-time buyers.
The 'swap' rates, which dictate how much lenders charge for fixed deals, are falling too. However, Hollingworth warns it may be dangerous for homeowners to wait to remortgage. 'With house prices falling, borrowers could find that while mortgage rates have dropped, the equity in their home has also reduced, taking them to the wrong side of a loan-to-value threshold, so they end up paying more.'
Savings
The 1.5 per cent cut to the base rate is bad news for savers. Banks and building societies have been forced to maintain savings rates at high levels so far: competition has been fierce for savers' deposits, which are the main source of money they have access to for lending to mortgage borrowers. But one bank spokesman on Friday said it would be impossible for this to continue: 'I think banks will take savers to the cleaners this time.'
So far, roughly 20 providers - mainly building societies - have withdrawn savings products in order to reprice them.
Stephen Noakes, marketing director for C&G, says : 'Because of the scale of the change, we are going to have to review [rates] product by product.'
He says C&G, in common with all other deposit takers, will reduce rates of different accounts by varying amounts, so it is more vital than ever that savers keep an eye on what their account is earning and that it is the best rate available to them.
While Lloyds TSB is the only major bank to have incorporated the base rate cut on its Easy Saver 2012 account, now paying just 2.5 per cent, it is widely expected that high-street banks will reprice their savings products soon.
Anglo Irish Bank cut its one-year fixed rate by 1.5 per cent to 5.55 per cent, and its seven-day notice and easy-access account by 1.15 per cent to 5.4 per cent and 5.25 per cent. Leeds Building Society is paying 3.5 per cent on its new one-year fixed-rate bond, while the three-year bond will pay 4 per cent.
'This could be a flavour of the savings rates to come,' says Andrew Hagger, savings expert from price comparison site Moneynet.co.uk. 'Soon, 4 per cent might start looking like a decent rate. But banks will also need to attract savers' money, so it may be that we see some slightly higher rates, but not like the 7 per cents of this year.'
On Friday, C&G was still offering fixed-rate deposits at 6 per cent, but Noakes warned that these were likely to be snapped up fast: 'The funding for these is arranged through swaps [a form of hedging] and we will keep the 6 per cent rate on sale for as long as we have the cover in existing hedges, but we are anticipating that this product will go quickly. The new hedging will not be so preferable.'
According to financial research company Defaqto, at the close of play on Friday the best fixed-rate accounts on offer were both from ICICI, set at 6.1 per cent for one year and 5.56 per cent for three years. These may not be available for long, so stay up to date with changes to accounts by visiting defaqto.com, moneyfacts.co.uk, or moneysupermarket.com.
If you miss these deals and are faced with rates of less than 5 per cent, you might want to consider using any spare cash you have (not including your redundancy safety net) for reducing your debt.
Annuities
Annuity rates are currently at about 7 per cent, but are expected to nose-dive in the near future, according to Hargreaves Lansdown's pensions expert McPhail. 'We don't know how quickly this will play out, nor how far rates will fall; these are really uncertain times. But if you are coming up to buying an annuity in the next year, we think you'd be better off going for it now.'
The best rates are paid on level annuities, which pay out a flat rate for life, but these run the risk of being eroded in value by inflation over time. Even though inflation is expected to go down now, it is likely to re-emerge at some stage in the future. Inflation-linked annuities are expensive right now, according to McPhail, so he recommends the compromise of an annuity which increases at a flat rate of 3 per cent a year.
• Additional reporting by Huma Qureshi
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