Mixed blessings - even for borrowers

The prospect of lower homeloan costs following the emergency cut in UK interest rates provided relief in a week of otherwise gloomy financial news.

But the base-rate cut will prove a mixed blessing for Britain's bank and building society customers.

While borrowers were celebrating the Bank of England's decision to cut the rate by 0.25% to 4.75% - the fifth cut this year - savers were ruing another drop in earnings.

Nationwide building society, the Halifax, and Bradford & Bingley were among those who announced they would be passing on the full 0.25% cut to borrowers. The Halifax will reduce its old standard variable rate to 6.5% and its controversial new SVR to 5.75% from October 1. Nationwide will reduce its standard variable rate (applied to borrowers with discounted mortgage rates) to 5.99% and its base mortgage rate (applied to those paying the society's normal variable rate) to 5.49%, again from October 1.

Bradford & Bingley is reducing its SVR to 6.5% from October 7.

But the cuts will also be passed on to savers: most financial institutions say they are 'under review'. Abbey National decided to spread the pain by passing on only 0.1% of the cut to borrowers, and leaving savers' rates unchanged.

David Hollingworth, of independent mortgage broker London & Country, says that borrowers who are nervous about the prospect of a recession should consider locking into the very low lending rates with a fixed-rate mortgage. He recommends a Portman building society loan fixed at 4.75% for two years (completion fee £300), or a Coventry loan fixed at 5.55% for five years (completion fee £295, free valuation and legal costs). For further details call 0800 373300.

Alternatively, you may want to switch to a flexible mortgage, which enables you to underpay or take a payment holiday if you run into financial difficulties.

Savers need more than ever to shop around for the best interest rates. According to MoneyFacts Intelligent Finance is paying 5.01 per cent on its no notice savings account, Smile is paying 5.5% on its cash mini Isa, and Alliance & Leicester is paying 4.5% on its EasySaver branch based account - all on deposits from £1.

With the stock market now at a four-year low, banks and building societies certainly have little competition for investors' affections.

The slump in share prices prompted insurer Friends Provident to implement a range of cuts in with-profits pensions and endowments. Endowment policies maturing now will be worth an average of 7.5% less than if they had matured before last week.

Most insurers are now imposing MVA penalties - normally only introduced at times of stock market crisis - on investors who want to take their money out early.

Renewed uncertainty about share prices has persuaded the financial services authority, the chief City regulator, to review the official forecasting figures it imposes on investment management companies when they quote projected returns on investments. If the rates are reduced, this will increase the projected shortfalls on millions of mortgages.