The Bank of England (BoE) has launched an unprecedented £50 billion scheme today to bail out Britain’s ailing banking system and help to ease the tightening mortgage market. What will the rescue package mean for ordinary households? We investigate.

What is the Bank of England offering ?

It is offering to take £50 billion in residential mortgages off lenders hands in exchange for gold-plated government bonds.

These taxpayer-backed loans are considered a far safer investment than a residential home loan and the scheme will hopefully bring an end to the lending freeze that has crippled the mortgage market, sending rates soaring.

Why is this necessary?

Mortgage rates have increased across the board because banks have been too nervous to lend money to one another. This has posed a huge problem for first-time buyers who no longer have access to cheap mortgages. It is also a headache for the millions of homeowners who are coming to the end of cheap deals who face a huge repayment shock when they remortgage.

What does this mean for homeowners?

Homeowners who were able to fix loans for two years at 4.3 per cent in 2006 now face rates of about 5.5 per cent if they want a similar deal. That works out as an extra £200 a year of repayments on a £200,000 mortgage.

Unfortunately, there is little in the Bank of England announcement that will change this in the short term. Although the banks have welcomed the move they have not committed themselves to reducing mortgage rates. The Council of Mortgage Lenders says it hopes that the plan "will have the desired effects of improving the liquidity position of the banking system and restoring confidence in financial markets" but added that "the improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks”.

Faced with this gloomy prognosis, those who need to remortgage in the next six months should start looking for a new deal now — especially if they want a tracker loan, whose rates are more dependent on wholesale money markets.

If it is a fixed-rate deal you're after, it may be better to hold up for a few months and see whether rates come down. The cost of funding a fixed-rate deal is not as expensive for the banks, and experts believe rates could fall.

What deals are on offer now?

Bradford & Bingley offers a two-year fix at 5.59 per cent with a fee of £999, however longer deals are cheaper. Abbey's three-year fix charges 5.49 per cent with a fee of £675, and the rate on HSBC's five-year fix is even lower at 5.39 per cent with a fee of £999.

A two-year tracker from Cheltenham & Gloucester is available at 5.64 per cent with a fee of £1,094.

What will the rescue package mean for first-time buyers?

First-time buyers are in the unenviable position of having to come up with a 10 per cent deposit for a decent loan, and a 25 per cent deposit if they want an affordable loan. Unfortunately, lenders aren't expected to make it easier to get a mortgage in the short term.

What will it mean for interest rates and house prices?

While the deal may help to avert a catastrophe in the City, it is unlikely to arrest the impending economic downturn and falling house prices. First-time buyers, therefore, should make sure they choose a home wisely to avoid falling into negative equity.

If the Bank's measures do help to end the lending freeze, the Bank of England may also be less inclined to cut interest rates. Ecomomists and the markets still predict at least another two rate cuts before the end of the year.