Rate cut will not be fully reflected in home loans: Vivien Goldsmith reports on how lenders reacted to the latest interest reduction

THE 1 per cent interest rate cut is likely to disappoint borrowers, who will not feel the full impact of the latest round of rate reductions. But savers are likely to be shielded from the full force of the 1 per cent reduction.

The first three mortgage lenders to react to the base rate change have opted for a new rate of 9.25 per cent from 1 December.

Abbey National, which announced earlier this week that it was scrapping its planned mortgage rate cut from 10.7 to 9.95 per cent on 1 November and instead cutting a further 0.35 percentage points from 1 December, is now going for an even larger cut in December.

The standard rate comes down to 9.25 per cent with loans over pounds 60,000 at 9.05 per cent and loans over pounds 100,000 at 8.85 per cent.

This gives a cut of 1.45 percentage points from the existing rate for basic mortgages and cuts of 1.14 and 1.15 points for larger loans. As rates fall the discounts for larger loans are being trimmed back.

The monthly payments on a pounds 50,000 endowment loan come down by pounds 51.35 to pounds 327.60.

John Bayliss, Abbey's deputy chairman, said: 'It would be fair to say that we will be looking slightly more favourably at savers.'

The savers' rate reductions will be varied across different accounts and different rate bands. The smallest cuts are usually reserved for the largest sums, where competition is fiercest and savers most apt to switch accounts. But Mr Bayliss said: 'There is an argument that you should remain true to your loyal savers.'

The first lender to cut its mortgage rate was Northern Rock, which sliced just 0.5 points off its basic rate to bring it down to 9.25 per cent from 1 December. National & Provincial followed suit.

New borrowers at Northern Rock get a 1.25 per cent discount until January 1994, bringing the initial rate down to 8 per cent. Those borrowing no more than 70 per cent of the property value get an extra discount to bring the initial rate down to 7.5 per cent.

Kevin Southwood, director and general manager of Northern Rock, said: 'If there is a further cut in the next few weeks we will roll that into the December cut.'

'We will be as gentle as we possibly can be with savers, but rates will have to come down.' He added that building societies were wary about the competition from National Savings. Rates paid on National Savings products were reduced recently but a spokesman said yesterday there were no plans for a further reduction.

A spokesman for Woolwich Building Society said the rate cut - the 13th consecutive cut since 1990 - was good news for borrowers. 'The mortgage rate will come down again, but in setting this rate we will have to consider the needs of investors. The biggest decision is how we treat our more than 4 million investors. We want to make sure we are not penalising them.'

Halifax said it was going ahead with the cut to 9.99 per cent scheduled for 1 November. 'This will be an interim reduction,' said David Gilchrist, general manager. Around 80 per cent of Halifax borrowers are on annual review and will not feel the impact of lower rates until next spring.

At Leeds Permanent, where 90 per cent are on annual review, the annual readjustment notices went out this week fixing the rate at 9.95 per cent for the 12 months from 1 November.

Mike Blackburn, chief executive, said: 'At last we've got some good news out of a very bleak week.'

Borrowers with Skipton Building Society get a cut in their rate to 10.25 per cent from Monday following a stand-alone rise from the society in August.

A society spokesman said Skipton borrowers would at least be paying less than those with Abbey National or Cheltenham & Gloucester, who were having to wait until December for a rate reduction.

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