Borrowers warned against rate cut spree

HOMEOWNERS were last night warned not to spend their mortgage windfalls on Christmas luxuries.

The shock decision by the Bank of England to cut the interest base rate by 1.5% means most consumers will save in excess of £100 a month.

Retailers, who are gearing up for a gloomy Christmas, welcomed the "perfect timing" of the cut, hoping it would put extra money into families' budgets in time for the seasonal rush to the stores.

But mortgage brokers contacted by this newspaper sounded a unanimous note of caution last night. They believe interest rates will begin rising again next year and advised homeowners to put the money aside or pay off outstanding debts to prepare for the tough economic times ahead.

As mortgage brokers waited to see lenders' new fixed and variable mortgage offers, expected this week, they warned borrowers not to snap up tempting deals that could shoot up if the interest rate increased again.

Optimism greeted the decision last week to slash the standard rate from 4.5% to 3%, the lowest point for 50 years.

The rate cut reduced the repayments on a typical tracker mortgage worth £125,000 by around £112 a month.

The majority of high-street banks have confirmed they will pass on the full cut, although HSBC and Barclays are among the firms yet to announce their intentions.

Ray Boulger, senior technical manager for mortgage advisers John Charcol, said: "Bearing in mind the size of the cut, people might find the pressure is off and they have spare cash in their pocket, but they should use it to buoy themselves up.

"A mortgage is the cheapest form of borrowing, so it is worth paying off other forms of debt first. If people can whittle down their other more expensive borrowing, such as credit cards and loans, then when interest rates go back up again they are in a better position to afford the payments."

Eric Harrison, managing director of CI Broker Services in Glasgow, added: "By the middle of next year the rate will start going up, and people need that money. It could head up to 9% in the next couple of years because it's not economically viable to have such a low interest rate when inflation is so high."

Steve McAvoy, director of Mortgage Help Scotland in Edinburgh, said: "I think it's sending out the wrong message to cut the interest rate so steeply because people will fall into the trap of thinking they have more money and blowing it all on Christmas."

He added that as banks and building societies launched their new deals, borrowers should exercise caution, and warned: "Customers might be tempted to go into low-rate deals, but the base rate could go up as well as down and people could get into real trouble."

Director of the Scottish Retail Consortium, Fiona Moriarty, said she hoped to see more spending on the high street. She said: "We are extremely pleased to see such a heavy rate cut, as that will help with consumer confidence and spending. It comes at a very important time for retailers in the run-up to Christmas. I think consumers are still going to be careful about how much they spend but it will be a bit of extra confidence."

HBOS and the Royal Bank of Scotland were among six of the high street banks to cut their standard rates by the full 1.5%, which led to mortgage deals with rates below 5% re-emerging for the first time in months.

Dr Peter Moles, senior finance lecturer at Edinburgh University, said he did not believe people would spend their money irresponsibly.

"The Bank of England hasn't reduced interest rates by this amount for a long time, and this comes across as a desperate signal to people that things are really bad, worse than we thought," he said. "With most people worrying about their jobs, I think people will use their money sensibly."

Rates of change

Standard rates at the UK's major lenders from December 1, 2008

Banks

Abbey: 5.44%

Royal Bank of Scotland: 5.19%

NatWest: 5.19%

HBOS: 5%

Lloyds TSB: 5%

Barclays: TBC

HSBC: TBC

Building societies

Northern Rock: 5.84%

Cheltenham & Gloucester: 5%

Scottish Widows: 4.99%

Nationwide: 4.69%