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Holders of tracker mortgages are looking forward to the lowest monthly payments in a lifetime following yesterday's base rate change, which is also set to slash the rates paid to savers.
Within hours of the Bank of England's announcement, all the big banks said they would pass on the rate cut to some extent. Customers can expect lower monthly repayments from January 1. However, savers can expect to see the interest they are paid fall to 1% or less. The Bank's second big rate cut in recent months was also bad news for anyone who is about to retire.
Mortgages
Some lucky tracker mortgage customers - whose interest rates shadow the Bank of England base rate - will be paying just 0.99% for their home loans.
Someone with a £100,000 interest-only deal at that rate is now paying just £82.50 a month - a payment that would have been unthinkable as little as a year ago.
After the heavily-trailed rate cut and pressure from the government, the majority of the big banks said they would pass on the full one percentage point cut. HSBC, Lloyds TSB/Cheltenham & Gloucester and Bristol & West announced immediately that they would pass it on in full
The majority state-owned Royal Bank of Scotland group, which includes NatWest, said it would not. Instead, it said it would adjust its rates by an amount that would strike "an appropriate balance between the interests of savers and borrowers in any decision it makes". This is understood to mean it aims to cut standard variable rate (SVR) by half a point to allow it to lessen the impact on savings rates.
It was joined by fellow government-backed lender Halifax Bank of Scotland. Britain's biggest lender said it would only cut its SVR by a quarter-point to 4.75% - again from January 1.
Earlier in the day Halifax said 500,000 customers on tracker deals would receive the full benefit of yesterday's rate cut. The announcement followed the intervention of the Financial Services Authority, which had been concerned Halifax would use terms buried in its small print that allow it not to pass on the full rate cut. Later Nationwide, the UK's biggest building society, said it would lower its SVR by 0.69 of a point. It said it would not enforce a controversial "floor" that allowed it not to pass on reductions to tracker customers if rates went below 2.75%.
Overall, the UK's 4m tracker mortgage holders have been the main beneficiaries of the collapse in interest rates. Since the Bank of England started cutting rates in the autumn, those with interest-only tracker mortgages will see their monthly mortgage payments halve by January 1.
Anyone with a fixed rate deal has had to watch in dismay as their borrowing costs have remained unchanged. Around 1m households have deals linked to the SVR and they are now paying 4%-6% - considerably more than those on trackers.
There was a ray of hope yesterday for anyone who has been frozen out of the mortgage market by the credit freeze. Cheltenham & Gloucester and First Direct launched reasonably-priced mortgages for up to 90% of a home's value. These deals had disappeared until this week.
Savers
When the Bank of England cut rates by one and a half points in November savings rates across the UK were slashed. Last night savers were facing further cuts, and they were racing to grab the last decent fixed rate savings products.
Saga said yesterday it would pull its one-year fixed rate bond paying 5.75% today and replace it with a 4.75% deal. The firm, which has £3bn of savings, said it "can only defy gravity for so long". Overall, savings rates on current accounts look likely to all but disappear. Nationwide, where some rates fell by as much as 1.6 points last month, says it is reviewing savings accounts but "these are not likely [to change] in the next few days". The Anglo Irish Bank's 5.75% fixed rate deal until February 2010 was last night doing brisk business as consumers sought to fix their savings at the remaining decent rates.
Retirement
The rate cut spells more gloom for those about to retire. Those in their 60s have watched on as the value of their pension pot has been badly hit by falls in the stockmarket. When they convert it to an annuity the income payouts are expected to fall to historic lows. Annuity rates - which give an income for life - are pegged to bonds which in turn feed off interest rates. This week bond yields fell to their lowest level for 30 years.
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