Will the base rate cut really help borrowers?
November 24, 2008
In the past the rules behind interest rates charged by mortgage lenders seemed to be pretty simple - when the Bank of England put up the base rate then mortgage lenders would put up their borrowing rates by the same amount, and when the Bank of England cut the base rate then lenders would cut their borrowing rates by that amount. Simple and straightforward.
However, it seems that this is no longer the case, and industry officials are concerned that there is no longer any relationship between base rate movements and borrowing rate movements. Of course, lenders are quick to increase their borrowing rates when the base rate increases but then the base rate is cut it is quite a different story, as the recent surprise 0.5% cut from the Bank of England has shown.
The government announced the rate cut just ahead of the scheduled Monetary Policy Committee meeting earlier this month, and hoped that the reduction in borrowing costs would boost consumer confidence, ease the financial strain for households, and boost the economy, as well as making mortgage more affordable for new borrowers. However, with only a small percentage of lenders planning to pass on the full rate cut it seems that many people won’t even benefit.
Officials have said that mortgage borrowing rates are now more closely tied to the amount of deposit that the lender is able to put down than to the Bank of England base rate, which is worrying news for first time buyers that tend to have little in the way of deposit.
One industry official said: “The rate cut is a bit of a red herring. It is not suddenly going to answer our prayers. If it had happened a year ago, I would have sprayed champagne around the room. Now, I am just guardedly optimistic.”
Another official said that lending had gone back to the days of old, stating: “There has been a return to the days of the mutual lending style. In the future, there will be a closer relationship between the size of your deposit and your mortgage rate than between base rates and mortgage rates.”
Predictions of further rate cuts, with some predicting that the base rate could fall as low as 2% over the next year, is resulting in increased interest in variable rate mortgages according to officials. One said: “It’s trackers all the way at the moment.”
Following the recent rate cut announced just 25% of lenders said that they full cut would be passed on to borrowers. HSBC said that it would not be passing on any of the rate cut, and even the nationalised Northern Rock is only passing on a small percentage of the cut.
An industry professional said: “Some lenders have announced a reduction in their SVR and have reduced their rate by the full amount. However, a growing number have chosen not to do this and only passed on a proportion of the cut or none at all.”
- Most borrowers will receive full 0.25% cut A recent report has predicted that most mortgage payers in the UK will in fact benefit from the full 0.25% base rate cut, despite initial fears that some consumers would never see the cut reflected
- Will the base interest rate be increased? It was not so long ago that borrowers and homeowners would wait with bated breath on the day of the Monetary Policy Committee meeting each month to see whether the base rate would go up
- Increase in mortgage interest rates despite base rate cut The nation's biggest building society, Nationwide, announced earlier this week that for the second time in the space of a week it was increasing the interest rate on some of its mortgage products. This comes
- Rate cuts not reflected by mortgage rates According to a recent report mortgage interest rates do not reflect base area cuts, with officials stating that the UK's major banks do not seem to be in any great rush to pass on recent
- Base rate cut to lowest level in nearly sixty years Earlier this month the Bank of England cut the base rate to its lowest level in nearly six decades, slashing it by a further 1 percent to just 2 percent. This brings the base rate
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