Why interest-rate cuts won't affect your mortgage

Interest rates are now lower than they have been for decades. That sounds like good news. But the truth is that when it comes to most of our mortgages, personal debt and credit cards, it isn't really news - it makes practically no difference at all.

Look at your mortgage. There is good news if you already have a tracker mortgage, in that you'll see the full cut hit your payments. That could mean a difference of around £130 a month on each £100,000 you owe. Not bad. But not everyone has a tracker; more have fixed rates which clearly won't be changing. And many more have various deals two-year discounts from the standard variable rate (SVR) and so on - that are unlikely to change to reflect the full rate cut. Some of the banks may have been forced by the government to adjust their rates, but others (mainly those not in need of much government financing) can't be bullied: HSBC is, for example, not planning to pass on the full cut via its SVR and at least another 20 lenders haven't yet announced their plans.

Rate cuts won't help people looking for a new mortgage

And what of the people looking for a new mortgage? Well, it won't make much difference to them. The banks all took the rate cut as a sign to take their trackers off the market in a hurry and mutter about reintroducing them later when market conditions are clearer. So you can bet your bottom dollar that when they do reintroduce them, they'll be tracking the base rate in a slightly different way to that of the past a more expensive way: they'll always be a few percent above the base rate rather than at, or (as they sometimes have been in the past), just below the base rate.

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There is also talk that some banks will introduce trackers that follow not the base rate but Libor the rate at which banks borrow from each other and the rate off which mortgages are actually priced. Either way, if you want a little hint about how low banks are prepared to let tracker rates go, look to the small print in a deal: over the last few weeks it has emerged that many trackers come with 'collars' which stop their rates falling below 3%. So it doesn't matter how much more base rates fall (and they could go to zero now the country's politicians have finally noticed the deflationary risks inherent in this recession), mortgage rates may have hit what the Sunday Times refers to as their "line in the sand."

The rate cuts won't make banks more willing to lend us money

More to the point, however, is that the fall in interest rates won't make banks any more interested in lending us money than they are already. Note that pretty much the only tracker rate left on the market is one from HSBC, which currently charges 3.99%. Then note that if you want it, you'd better turn up at the bank with a 40% deposit. No one else is eligible.

The same goes for the good discount mortgages out there. Some may look good, but most of us can't have them. This time last year, there were well over 1,000 mortgages on the market aimed at those with a 10% deposit. Today there are only around 200. Oh, and don't bother applying for those if you haven't got a perfect credit rating - or indeed if you are looking to remortgage, but the value of your equity in your home has fallen below 90% since you took out your last mortgage.

Fixed rate mortgages come with much the same caveats. The most attractive-looking deals on the market come in at around 5.3% fixed for three years at the moment, but if you want them, you need at least a 30% deposit. The banks don't want to take risks. They want to be left alone to rebuild their balance sheets. They also can't lend money they don't have, at rates they can't get (Libor, their rate, is still much higher than the base rate). And if they won't or can't give you a loan, what difference does it make if the rate they might have asked you to pay, had they agreed to give you a loan, has fallen by 1.5%? Quite.

Mortgages aren't the only loans to be utterly unaffected by last week's dramatic rate cuts. Look at your credit cards. Think the 1.5% interest rate cut will make a difference to what you pay on them? Think again. According to the Independent, the annual rate on these is now up to 17.6%, while your average store card (and these, by the way, should never ever be used) is now charging 25%. Overall, says Moneyexpert.com, the average rate for an unsecured loan is around 21% and Black Horse, the lending arm of Lloyds TSB, raised its loan rates by an astonishing 9% last month, says The Times. Borrow £1,000-£3,000 from them and you'll pay "an eye watering" 36%. Puts 1.5% in perspective doesn't it?

The lucky couples making money on their mortgages

Now to the good news. There isn't much of it but as the FT points out, there is a small number of people who have trackers that now fall well below 3% (they were designed to always fall below the base rate). This lot could now find that rather than using any spare cash to pay down their mortgage as is usually advised they should save it. Plenty of accounts still pay more than 5% on savings, meaning that, even if they are 40% taxpayers, they'll make more money out of not paying their mortgage off than paying it off. In some cases, says Ray Boulger of John Charcol, this mortgage 'arbitrage' could be worth "thousands of pounds" and even more for a couple in which one is a non-taxpayer (the savings could be in their name making them tax-free). It's just a shame there aren't more of these lucky couples.

This article is taken from Merryn Somerset Webb's weekly Money Sense email. Sign up to Money Sense here.

Merryn's book, Love is Not Enough: The Smart Woman's Guide to Money, is now out in paperback.