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Interest rates may have dropped to a 300-year low following this week's move by the Bank of England, but many mortgage holders may end up feeling short changed. The reduction to 1.5% is bad news for savers too, who may find their nest egg is earning even less than inflation. But whether you're a saver or a borrower, doing nothing is not an option. Here's what you need to do now

What to do if you're a borrower

If you're a first time buyer
Without a deposit, would-be first time buyers may still find their attempts to buy a property thwarted following the decision. John Phillips, financial services director at estate agent Kinleigh Folkard & Hayward, says some lenders are starting to offer higher loan-to-value mortgages but that these are still few and far between. He says: "The start of the New Year will see lenders releasing new mortgage products but even so any new deals will be offered to borrowers with large deposits." And that means the only course of action open to aspiring homeowners is to keep saving. 

If you're on a high fixed-rate deal
The cost of fixed-rate mortgages has only fallen slightly since last month’s rate cut despite swap rates - the money market mechanisms used to fund bank lending for mortgages - falling to record lows. Ray Boulger of independent mortgage adviser John Charcol says staying put may be an option unless you are coming to the end of a fixed rate period. "The time to switch to a fixed rate may well come this year but we are not there yet,” he urges.

If you have little or no equity
Unless you're desperate to move, your only option may be to stay put in your existing home. If you are on a collar-less tracker - a mortgage that tracks all falls in the Bank of England base rate - then the chances are you'll be paying less interest than if you are on a standard variable interest rate. Boulger points out the current range of SVRs varies from 2.3% (First Direct) to 5.99% (Scarborough). He only expects a small minority of lenders to pass the full cut on to their SVR. Some lenders, such as Nationwide and Lloyds TSB have announced they will pass on the cut with effect from February 1.

If you're on a tracker
Most borrowers will benefit from the rate reduction but Boulger estimates that some 300,000 out of the approximately 4 million borrowers with a tracker mortgage will not benefit from the rate cut because they have a collar, or floor, on their tracker rate - meaning that their rates won't fall below a certain level, irrespective of interest rate falls. "Trackers with no collar, remain the ideal mortgage product in today’s market, although borrowers needing in excess of 75% loan to value (LTV) will find very little choice, and none above 80% LTV," he says.

What to do if you're a saver

Check your rate
Just a few months ago banks were tripping over each other to lure in savers. No longer - times have changed and being able to fix your savings rate is no longer an option. Many of the variable rate accounts have not yet had their interest rates re-priced following December's cut, but expect them to fall. Recent rate reductions include the Anglo Irish five-year fixed-rate bond by 0.5% to 4%, while the rate on its one-year bond has dropped from 5% to 4.6%. Nationwide cut its savings rates by an average 0.87%. Many other banks and building societies including Abbey, which is owned by Santander, are still in the process of reviewing their rates - so it could pay you to keep a close eye on the market.

Switch if you're suffering
You need to be proactive if you are going to chase the best rates. Comparison sites including www.moneyfacts.co.uk provide independent up-to-date best buy tables on all types of savings accounts. Savings accounts are not your only option though. Edward Menashy, chief economist at stockbroker Charles Stanley, says investors could opt for more risky investments in order to beat inflation. He says “Clients seeking to maximise income should consider corporate bonds, whilst high taxpayers seeking to protect their capital should consider short-dated index-linked gilts.”


Maximise your tax-free allowance
Open an account which allows you to earn tax-free interest in order to eek out the most of your savings. Gordon Lishman of Age Concern, advises savers to look at opening an individual savings account (ISA). "Older savers should ensure they are making the most of their money by checking they are not over-paying the tax on their savings and shopping around if they feel they are getting a poor deal," he says.

Watch out for bonus rates
Some of the higher paying savings accounts come with a bonus, which will only pay the higher rate for a limited period. For example Abbey has a monthly savings account paying 7% for 12 months, but this rate only applies if you take out a regular investment, pension or personal protection plan with the bank, and only if you make no withdrawals for 12 months. Make a withdrawal and the rate drops to 4.59%. Several other building societies and banks including Newcastle and Britannia are offering a 1% bonus for the first 12 months of the account - both accounts normally pay 3.50%.

Article Courtesy of Samantha Downes @ Sky Money