1.5% Base rate cut to 3%

I moved a chunk of my money into a two-year fixed rate bond last week. This was on the cards then although the size of the cut is a shocker.

I hope not, I want to buy a bigger one.

It would seem that the BoE thinks there is a very real risk of deflation.

This move seems to me to indicate that there is real trouble ahead.

I've got a tracker mortgage that is tied to base rates. I wonder if it's worth me overpaying my mortgage now that my rate is 3.6% Would I be better sticking the extra payment in a savings account?

depends - banks need cash, and there have been some good savings rates round for a while. I would be surprised if savings rates crashed by

Eh ? dont you mean you therefore WANT them to keep falling so that the price gaps close between tiers ?!

Depends on your tax status. You would need a savings account paying 6% to cover the tax. Not difficult now, but we'll have to see if savings rates come down. Personally, I'd keep payments the same if you can afford to and overpay without feeling any change.

One finance channel stated savings rates would not fall that much as banks still need to entice money in.

Nationwide are still offering 6% on a 6-month bond. Think it was 6.5% so it's not down much.

The BoE rate is becoming an irrelavence, the cost of money isn't as closely tied to the BoE rate as it was. Most lenders are unlikely to be able to afford to pass on the whole cut to borrowers, which is why many are withdrawing tracker mortgages or significantly revising the base rate differential.

Of course you'll get the same stupid people (including government ministers) who were critical of banks' rash lending policies who'll now criticise the banks for being more cautious and not passing on the whole rate cut. Robert Peston sums it up well in his blog:

That's what he said!

Why is not passing on the rate cut[1] being more cautious? Surely the area of caution/rashness is in the decision on whether or not to grant a particular loan. A lower interest rate will mean lower repayments and therefore also lower the probability of the borrower having difficulty in making the repayments[2] and defaulting.

Of course it isn't. All loans carry a risk of default and that risk has to be priced into the cost of the loan. The reason for the current mess is that risk of default was way under estimated.

That is such screwed logic. The higher the risk of default, the higher the loan rate has to be, unless you expect someone else to subsidise the defaults, like the taxpayer.

In message , Andy Pandy writes

They have dropped their rate to 5.5% on 1 and 2 year ISA's since I swapped some in from my Members' ISA Bond last April at 6.15%.

I'm tempted to tie some more up even at 5.5, as the members' Bond rate is looking pathetic at 4.55% on 10,000.

The variable rates will have to come down in the next year or so, surely?

In message , Andy Pandy writes

I'm already doing that! :-(

Bitstring , from the wonderful person Andy Pandy said

Aka 'pure greed'. If you loan to blue chip companies at base rate +1% you can only make base rate + 1%. If you loan to screwballs at base rate

But the risk of default has not risen across the board. Take, for example, a mortgage where the borrower has been paying their payments for years. The risk of that loan has not risen, yet they are paying more for it. Raising the interest rate could *increase* the risk of default.

Have tiered interest rates depending on the risks. There's no reason, except for profiteering, to charge higher rates for low risk borrowers IMHO.

What has become clear is that risk was mispriced during the credit bubble. The banks charged too low a rate for all the risk that was undertaken. Now that this is being corrected, it is true that the risk of that particular loan hasn't changed, but the underpricing of it is being corrected.

FoFP

I would argue that the underpricing of loans is not universal. Loans from the subprime housing market were, of course, much more risky.