Does Rate Cut Mean Cheaper Mortgages?
Last Thursday the Bank of England announced a quarter point cut in the base rate from 5.5% to 5.25%. For many homeowners this immediately sparked wonder as to whether or not mortgage rates would follow suit.
No sooner had news about the rate cut hit the headlines, further announcements went into circulation regarding mortgage lenders passing on the full quarter point to their borrowers. But will this result in cheaper mortgages? And will it have any real impact on the growing panic within the property market?
Naturally, the majority of mortgage lenders will wait until March 1st before any potential changes are made to their standard variable rates. In this respect, one might expect that mortgage rates will be set to come down again. However, just how much mortgage repayments look set to fall could be somewhat of a no-win situation as figures reveal that many mortgage holders will actually come out paying more each month than they did last year.
Before the latest cut by the BoE, the average mortgage rate stood at 5.93%. Yet when interest rates were at 5.5% last May, the average mortgage rate was 5.66%. This means that regardless of whether the average mortgage rate falls by the full quarter point to 5.68%, rates will still be higher than they were just 8 months ago.
Nationwide, one of the UK's leading mortgage lenders, has already confirmed that it will be passing on the rate cut in full to its mortgage customers. At first glance this may seem like fair play, but let's not forget how Nationwide raised its tracker mortgage rates by 0.15% just last month. Therefore, any quarter point rate cut will in fact only bring customers' tracker rate mortgages down by a mere 0.1%.
Unfortunately, Nationwide does not stand alone in what seems to be nothing more than a profit-making scheme. Several other banks and building societies are now increasingly more concerned with their profit margins as opposed to their market share. Regardless of any interest rate cuts, long gone are the days of easy lending. With tighter lending conditions and all loans being kept on their balance sheets, mortgage lenders have become considerably more picky as to who they lend to which in turn has shifted focus onto making more profit on the loan itself.
With mortgage rates seeming less likely to make much of a difference as to how much one can save, it only adds to the mounting worries customers are faced with when it comes to financial strain. Higher energy and food costs already have a major impact on just how tight we are pulling those purse strings. As inflation hit a record high in January, it would come as no surprise if the overall cost of living rises sharply in the months to come.
It can be said that should consumers gain any savings on their mortgage bills, it will only be swallowed up by an increase in everyday living expenses. As for the property market, with less spare cash in our pockets and banks tightening up their lending criteria anyway, a drop in the interest rate may not help as much as a drop in house prices.
Published on February 11, 2008
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