Bank Interest Rate Cut Again
The Bank of England cut the base rate from 5.25 to 5% today the 10th April 2008 in an effort to bolster consumer confidence at a time of continued uncertainty. Is the move too little, too late - or will it provide some much-needed relief for homeowners? We take a look
This move marks the third such cut in the past five months and takes the Bank rate to its lowest in more than a year.
Slowing economic growth, particularly shown by survey indicators of output, and a weaker housing market will have played a part in the decision by the bank's Monetary Policy Committee.
Experts welcomed the downward move but the majority agreed that another cut will be needed soon and also that the Bank of England needs to inject some liquidity into the market to stop mortgage deals drying up.
Although the base rate cut is good news for those on mortgage deals tracking the base rate, the base rate is no longer a good guide to the cost or availability of funds to lenders or new products coming on to the market.
"All borrowers with an existing bank rate tracker mortgage will see the full benefit of today's cut, but borrowers taking a new tracker mortgage today will still be paying more than the initial rate new borrowers on a tracker mortgage paid when Bank Rate was at its recent peak of 5.75% last summer," says Ray Boulger of mortgage broker John Charcol. "This is because lenders' tracker margins have on average increased over this period by about 1.25%."
No mortgage cuts?
While lenders are still facing liquidity problems and are unable to secure funds on the money markets it's likely that mortgage products will be priced higher than previously and subject to tightened criteria.
"Libor rates, which is the rate that banks lend to each other, has consistently been 0.75% over the Bank of England Base Rate; in a normal market I would expect it to be either the Bank of England Base rate or slightly lower," says John Postlethwaite, principal at Punter Southall Financial Management. "This is why the banks are unable to secure funds at a reasonable rate to lend out."
About 1.4 million people will come to the end of a fixed-term deal this year and the average homeowner with a £150,000 mortgage will have to pay between £60 and £120 a month extra for a new fixed-term deal.
Nationwide Building Society raised rates by as much as 0.32% on some products today and yesterday, before the Bank decision, several mortgage lenders including Alliance & Leicester, Chelsea Building Society, Standard Life Bank and Leeds Building Society raised rates on some of their mortgage products by as much as 0.26%.
Those who have less than 5% equity will find it especially difficult to find a new fixed rate and are likely to have to pay their lender's expensive standard variable rate. These average about 7.5%. This could add more than £200 a month to the monthly cost of a £150,000 mortgage
Balancing act
Michael Coogan, Council of Mortgage Lenders director general, says the Bank of England needs to coordinate successive base rate cuts with further injections of more widely available liquidity.
"We would like to see another base rate cut next month partnered with more liquidity auctions, of higher amounts, over longer terms, and available to a wider range of institutions," he says. "This coordinated approach would help to show the authorities are serious about tackling the market problems."
Courtesy of Emma Lunn @ Sky Money
