Video: James Harding analyses the interest rate cut

Read the statement from the Bank of England

Calculate what the cut means for your mortgage

Mortgage payers received a welcome boost to their finances yesterday when the Bank of England cut interest rates for the first time in more than two years, and signalled more cuts early next year.

The rate cut came as it emerged that a growing number of lenders are charging punitively high set-up fees to start or renegotiate a mortgage in an attempt to claw back money lost by offering competitive headline home-loan rates.

The Bank’s quarter-point cut, to 5.5 per cent, is seen as an attempt to stave off the threat of a severe economic downturn next year. It was accompanied by ominous warnings over worsening market conditions, which the Bank said would make it more difficult and more costly for individuals and companies to borrow money.

The Bank’s rate-setting committee shrugged off nagging worries over the inflationary risks of making a cut, after growing concerns over falls in house prices and a spate of bleak news from other key parts of the economy. The cut, the first since August 2005, will save a homeowner with a typical £100,000 tracker mortgage, linked to the base rate, about £15 a month or £180 a year on repayments.

However, many first-time buyers will find themselves caught by the soaring arrangement fees levied by lenders on their products. Halifax, for example, was charging a £299 fee in November 2002 on its lowest two-year fixed rate. The equivalent product now attracts a £4,500 charge.

Hopes that yesterday’s rate reduction is only the first of a series of cuts leapt after the Bank said that fresh turmoil in money markets meant the economy faced the threat of a still sharper setback than it predicted early last month.

The Bank signalled only a month ago that an impending slide in consumer and business spending would probably mean at least two interest-rate cuts would be needed next year.

City experts said that the latest comments from the Bank’s powerful Monetary Policy Committee pointed to three or more further cuts in the cost of borrowing during the next 12 months.

The economists who are most anxious over prospects, such as Roger Bootle, of Deloitte, the accountants, predicted that base rates could drop from 5.5 per cent today to 4.5 per cent next year, and to 4 per cent in 2009.

Yesterday the country’s biggest mortgage lenders, Halifax and Nationwide, were swift to lower their standard variable rates, and rates on tracker loans, in line with the Bank’s cut.

Other lenders were under pressure to follow suit but there were warnings that some, struggling with higher costs for raising funds in stressed markets, could be tardy in doing so. Millions of homebuyers on fixed-rate deals would also see little benefit, experts added.

Expectations of action this week from the Bank had soared after grim news on the housing market and the crucial services sector. Halifax figures showed that house prices fell for three months in a row by a total of 2.4 per cent — their fastest decline since 1992.

The rate cut was hailed by business leaders as a welcome first step, but they said that further action by the Bank would be needed.

The MPC’s move will also a relief to ministers fearful that a sharp downturn will add to the litany of woes battering Gordon Brown’s Government.

David Cameron, the Conservative leader, seized on warnings over a vulnerable economy from the influential Organisation for Economic Co-operation and Development yesterday to claim that the Prime Minister “failed to prepare us if uncertain times lie ahead” while Chancellor.

In a report on global prospects, the OECD said house prices were set to see a “further damping” , with those at the “upper end” in London and otherbig cities likely to be hit by falling bonuses for financial professionals. The OECD also noted a threat of a “significant slump” in house prices that would spell severe fallout. It argued that the UK “could be more vulnerable than most countries to the impact from financial turmoil”, and cited “evidence that the housing market is turning sharply down”. Consumer spending was set to “significantly slow”, it added.

Mr Cameron said that Mr Brown was guilty of presiding over failures in three areas that had left the economy ill-prepared for tougher times. There was “failure of confidence, failure of prudence and failure of competitiveness”, he said. The Conservatives also highlighted the OECD’s warning that the Chancellor was badly boxed-in over the Government’s finances.