It was only three months ago when the financial news headlines were filled with stories about the soaring rate of inflation and how the headline rate had exceeded 5 per cent, more than two and a half times the Government’s target figure of 2 per cent, leading to speculation about an increase in the base rate of interest to compensate for this.

If proof were needed to show just how turbulent things are in the financial system at the moment, since that time, interest rates have fallen by 2 per cent and last week it was announced that the Consumer Prices Index rate of inflation had dropped to 4.5 per cent.

Many experts had predicted that inflation would start to reduce towards the end of this year and the fact that it has done and also looks set to fall further, has prompted people to think about the likely possibility of the Bank of England cutting the base rate of interest by a further 1 per cent before the end of the year.

For those borrowers with a tracker rate on their home owner loan or secured loan this could mean a monthly saving of around £83 on a typical loan of £100,000.

Although the base rate of interest has fallen dramatically to 3 per cent, the inter bank lending rate, LIBOR (London Inter Bank Offered Rate) still remains higher at 4.15 per cent, although this is continuing to fall, closing the gap with the base rate.

It will only be when LIBOR drops to a comparable level with the base rate that we should start to see some more competitive deals emerging on home owner loans and secured loans. These are likely to be the first type of loan to benefit from the rate cuts, but it could be some time before this filters through to the unsecured loan market.

Since the start of the credit crunch, now more than a year ago, we have seen a constant tightening of lending criteria from banks, building societies and other loan companies, as they have become ever more cautious about the type of person which they are prepared to offer a loan or other credit to.

This has been most noticeable in the mortgage or home owner loan sector, probably because this area has been publicised more than any other, but the same applies to personal loans and credit cards and it would appear that lenders are continuing to restrict their criteria even further.

According to a new report from MoneyExpert.com, somewhere in the region of 75 per cent of all personal loan companies now require the applicant to have a minimum level of income before they will even be considered for a new loan.

Just six months ago, this figure stood at only 68 per cent, which shows lenders are continuing to restrict an individuals ability to obtain credit, at a time when many potential borrowers need a loan more than ever. The same pattern is emerging in the credit card market also, with 47 per cent of all card companies requiring minimum income levels, compared with only 31 per cent at the same time last year.

Sean Gardner of MoneyExpert.com said “Lenders are putting more and more barriers in the way of borrowers as they attempt to keep bad debts under control. Providers of loans and credit cards now not only require good credit histories but increasingly are looking for evidence of a steady income stream and borrowers need to prove they are in work.

While it’s certainly a good thing that those in financial difficulty avoid digging themselves deeper into debt, the recent rise in unemployment figures represents a worrying possibility of many being unable to get access to credit when they need it most.”

The recent news that the Bank of England has reduced interest rates by a total of 2 per cent over the course of the last two months and are likely to make further cuts going forward, has come as a breath of fresh air to a large number of home owners, particularly since the majority of banks and building societies have passed on the savings to borrowers with home owner loans and other secured loans.

On a typical loan of £100,000, a borrower could save in the region of £166 every month due to the recent rate cut, making the monthly budget significantly easier.

However, if a borrower were to keep their secured loan repayments at the same level as they were before the rate cut came into effect, they could make significant savings on the overall cost of their home owner loan over the long term and on average, repay the entire loan a total of six years earlier than they would previously have done.

Drew Wotherspoon, of the mortgage firm John Charcoal said “As interest rates fall, it provides the perfect opportunity for borrowers with trackers to pay their mortgage back quicker, taking six years off your mortgage is something we would all like to do.”

Of course, for those individuals who have other unsecured loans and credit card debts, it may be prudent to use the spare cash each month to repay these debts first, as they are likely to charge a much higher rate of interest than a secured loan and therefore create even larger savings than would be achieved from repaying the home owner loan first.

Once these more expensive debts are cleared, it would then be possible to save even more on the mortgage loan, without spending any additional money each month.

The majority of people living in the UK at the moment probably don’t need telling that finances are becoming tighter than they have ever been, as they are already experiencing this on a first hand basis.

Since the onset of the credit crunch, many individuals have seen the value of their homes decrease steadily over the months and it has become increasingly difficult for any one to obtain finance through a home owner loan, or even any other type of personal loan, as lenders continue to tighten their lending criteria for borrowers.

One organisation, the Alliance Trust, which monitors the state of household finances through its Financial Reality Index, now claims that in general, household finances are now at the lowest level since they started to keep records eleven years ago, due to falling house prices and increasing loan and credit card debt.

The index uses three factors to determine how well off we all are, household budget, economic situation and overall household wealth. The most affected areas are household budget and wealth, with the cost of living rising well above average wage increases to tighten budgets and falling house prices reducing overall wealth. However, it now appears that individuals are starting to adjust their spending to bring their budgets in line with the current situation.

Shona Dobie of the Alliance Trust said “Since the launch of our index, 11 years ago, we have seen a very close relationship between consumer spending and financial reality. Over the past three years, however, this trend has been affected by consumers continuing to spend despite increasingly worsening financial circumstances. We are now at a point where we see signs that consumers are catching up with their financial reality and bringing spending back in line with their means. Over the coming months and quarters, we expect this trend to continue.”

Over the course of the past two months we have seen a dramatic cut in the Bank of England base rate of interest.

In October there was a reduction of 0.5 per cent, followed this month by an astonishing cut of 1.5 per cent and after much discussion and not to mention a certain amount of pressure from the Government, the majority of banks and building societies, particularly the larger organisations, have been forced to pass on some, or all of these savings onto those customers with home owner loans and secured loans on their properties.

The latest economic outlook for the housing and mortgage loan markets from Capital Economics, has now predicted further cuts in interest rates are to follow over the next few months, despite the recent decreases and estimate that by the end of next year, borrowers applying for a new secured loan could be looking at interest rates of around 3 per cent.

However, this may not be the case for everybody who already has a home owner loan secured on their property. Although existing borrowers are likely to see further reductions in the monthly cost of their loan repayments, many lenders, particularly those offering tracker rates, have applied a collar rate to their products.

This means that the interest charged on a loan will not fall below a certain level, regardless of what the base rate does, although not all lenders have applied this criteria and the level varies significantly across those who have done so. It is therefore worth checking the small print on your home owner loan offer in order to see what applies to your own loan.

At around the same time as Novembers interest rate cut, practically all lenders withdrew all their tracker rate products, until they knew what was going to happen. A couple of weeks later and we are slowly starting to see tracker rates return to the market, although many of these are now set at a higher margin above base rate than they were previously.

Although lower rates are now making secured loans cheaper, unsecured loans still remain relatively expensive and it may still be some time yet before we see these rate cuts filter through to the unsecured lending market.