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At 2% the Bank of England base rate is already at its lowest since 1951 following a series of swingeing cuts, and if a widely anticipated cut materialises today, it will reach a low not seen in the bank's 315-year history. Some experts are predicting a cut of 0.5%, some expect rates to fall as low as 1%. But if commentators have it right, it will not be a case of if but by how much the Bank of England will slash interest rates.
A big cut should make life easier for mortgage borrowers, at least in theory. Ray Boulger, senior technical manager at mortgage broker John Charcol says: "The sooner they [interest rates] get down to whatever level they need to get to, the better." However, the UK's savers could be left feeling rather despondent as interest paid on their cash plummets.
I have a tracker mortgage - will my repayments fall?
"Many borrowers on tracker rates are likely to benefit from a reduction in Bank rate," says the Council of Mortgage Lenders. "However, as the Bank rate is already very low, some trackers will be reaching their floors."
These floors – or collars as they are usually referred to – are in the terms and conditions of some tracker mortgages and set a lower limit on a borrower's pay rate. For some borrowers, such as those with Norwich & Peterborough where the collar is 3%, rates have already gone as low as they will get.
Nationwide has a collar of 2.75% on mortgages taken out before 1 December last year. It waived it last month and reduced the rates paid by tracker customers in line with the base rate cut, but it has said it will not pass on further cuts. For customers with loans taken out since 1 December 2008 the collar is set at 1%.
Most other lenders do not include a collar in their terms and conditions, which mean rates will carry on going down as long as the base rate falls, even if it reaches 0%.
What if my loan is linked to my lender's standard variable rate?
While lenders can usually choose whether or not to pass on cuts in SVRs, in this instance some will have to do so. This is because some lenders' terms and conditions state that the difference between their SVR and the base rate cannot exceed a certain level.
For example, under Nationwide's SVR terms and conditions the difference between the base rate and the SVR cannot exceed 2%. And since the SVR is now at 4%, and the base rate 2%, the lender will have to pass on any cut tomorrow in full. This means that, unusually, SVR customers will benefit from a cut in rates tomorrow while tracker customers will not.
Cheltenham & Gloucester and Lloyds TSB, too, will pass on any cut with effect from 1 February. If the base rate is cut by half a percentage point, Lloyds TSB and C&G variable rate customers will make a saving of £40.82. If rates are cut by a full point, the monthly saving will be £80.44.
Other lenders are not contractually obliged to pass on the cut.
I have a fixed-rate mortgage – will my repayments change?
For around half of borrowers the base rate change will have no impact because they are on fixed-rate mortgages.
For new customers looking for a fixed-rate loan, the future is uncertain. Some lenders have announced lower rates, but these often come hand in hand with the need for a big deposit. Britannia building society has announced a range of two-year fixed rate deals with rates with an arrangement fee of £549, starting at 4.74%, but you would need a 40% deposit to qualify, and with a minimum 15% deposit you could pay 5.74%.
Alliance & Leicester has also launched new fixed-rate deals, including one at 3.49%, although this comes with a 2% fee and is only available if you have a 40% deposit.
I am a saver - should I expect bad news?
Times are already tough for savers who are watching pitifully low interest rates allow inflation to nibble away at their nest eggs, and a further cut will not help matters. A number of savings providers pulled their fixed-rate accounts or dropped the rates on variable accounts, and cuts are still filtering through even from December's cut.
This week Anglo Irish announced it was cutting rates on its five-year fixed-rate bond by 0.5% to 4%, while the rate on its one-year bond has dropped from 5% to 4.6%. Nationwide cut savings rates by an average 0.87%, although many saw much greater drops than that.
The days of headline-grabbing savings accounts are all but gone, and those that do pop up come with strings attached. Abbey has launched an account for monthly savings with a headline rate of 7%, fixed for 12 months, but this rate only applies if you take out a regular investment, pension or personal protection plan with the bank, and only if you make no withdrawals for 12 months. The rate drops to 4.59% if you make one withdrawal.
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