Economics Tricks

The Bank of England's monetary policy committee (MPC) has opted to leave interest rates unchanged for the remainder of this month, it has emerged.

Standing at 5.25 per cent, the base rate of interest attached to mortgages, loans and other forms of borrowing is to stay consistent until the MPC's next meeting in early April. The announcement follows the 0.25 percentage point reductions seen both last month and in December. The rate now stands at the same level as seen in January 2006.

For many consumers the news could be welcomed, as homeowners may discover that their mortgage providers will choose not to increase their monthly repayments.

However, David Kuo, head of personal finance for Fool claimed that today's decision is likely to be "very disappointing for homeowners". He suggested that in particular the estimated 1.4 million people who have a fixed-rate mortgage deal due to end in the coming year will come under pressure. The financial expert suggested that if they are unable to switch to a new fixed-rate contract and have to gone on to their money lender's standard variable-rate deal, those with a 100,000 pounds mortgage could see their monthly repayments surge by around 200 pounds.

Following on from such an increase it is possible that people may develop problems with meeting other demands on their finances such as personal loans, credit and store cards, utility bills and transport costs. Mr Kuo claimed that such consumers must take steps to reduce pressure on their finances. He said: "People who can't switch may have to drastically cut their household expenditure to afford the higher repayments. But rather than wait for the inevitable to happen, homeowners can overpay their mortgage now by exploiting the time before their fixed-rate deals end. Making additional monthly payments of 200 pounds on a 100,000 pounds mortgage will cut the outstanding debt to 95,550 pounds instead of 98,000 pounds after twelve months. Apart from reducing future repayments, it will put you in a better position when you remortgage."

The personal finance head also reported that as the availability of cheap loans and other forms of competitively-priced credit begins to fall, consumers need to take "active steps now" to make sure that they are getting the best deals possible.

Chief economist for Lloyds TSB Trevor Williams added that the maintaining of the rate came as the Bank looks to balance against a predicted economic slump and inflation rises. He also cited research which indicated that last month saw an increase in manufacturing and services activity after a period of slowing growth during the previous 12 weeks. Meanwhile, Mr Williams claimed that money supply surged to 12.9 per cent. The financial expert suggested that, due to such figures, the MPC may choose to maintain rates for several months as the economy is "still far from recession". However, he did point out that consumer confidence is diminishing and the property sector is "flattening".

After today's news, it may now be an ideal time for many consumers to apply for a loan. With interest rates potentially set to be left unchanged for a period of time, prospective borrowers may discover that they are able select a low-cost loan which leaves them with affordable repayments to make each month. This may be of particular assistance to those struggling to afford the various expenses of buying a home. Recently Moneyfacts reported that the number of money lenders offering loan-to-value rates of 100 per cent or more has fallen during the past three months.