Mortgage lenders and savings providers react to the interest rate decision and experts explain what it means for individuals
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• Reaction from Mortgage lenders
• Reaction from Savings providers
• Comment on What this means for Individuals
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Reaction from Mortgage lenders
Nationwide Building Society cuts its Base Mortgage Rate (BMR) – its version of a standard variable rate – from 4.00 per cent to 3.50 per cent from February 1 2009.
HSBC: passes on the full cut to all mortgage and commercial borrowers. The bank’s variable mortgage rate will fall to 3.94 per cent and all tracker mortgages – including the tracker currently on sale – will be cut in-line with the base rate change.
Lloyds TSB: passes on the full cut on its standard variable rate (SVR) from 4 per cent to 3.5 per cent. It will pass on the full cut to all of its tracker rate customers.
Halifax: passes a 0.25 percentage point cut to its SVR making it now 4.5%. It will pass on the full cut to all of its existing customers with tracker mortgages.
Woolwich: has withdrawn all of its current tracker and offset mortgage products.
RBS: SVR is currently under review. It will pass on the full cut to all of its existing curstomers with tracker mortgages.
Abbey: Its SVR, currently at 4.94%, is under review.
Northern Rock: Is reviewing its SVR, currently at 5.34%
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Reaction from Savings providers
Traditionally savings institutions take longer to react to cuts in the Bank of England base rate but there have been a few drops in the rates leading up to Thursday’s decision.
West Bromwich Building Society: has cut its tracker savings account by the full 0.5%. So now its Base Rate Tracker is paying 1.25%, Its Direct Tracker Saver pays 1.25%, the Acorn Regular Raver pays 2%, and the Oak account is paying1%.
Norwich Union base rate tracker savings account passed on 0.49 per cent cut so it is now paying just 1%.
ICICI Bank UK cut its HiSave Fixed Rate 12 month Bond account by 0.5 percentage points to 4.65 per cent, meaning it is no longer possible to get more than 5% interest on a savings account.
In the week ahead of the cut, the following institutions dropped their rates by up to 0.5% each –
Alliance & Leicester
Asda
Barclays Bank
Cambridge Building Society
Capital One Savings
Intelligent Finance
Lloyds TSB
NatWest
Scarborough Building Society
BMW Savings
Cheshire Building Society
Newbury Building Society
West Bromwich Building Society
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Comment from experts on what this means for individuals
FOR SAVERS
Building Societies Association: Adrian Coles, director-general of the BSA, said: “It is savers who will bear the brunt of today’s decision. Already savers have seen their interest payments cut as a result of earlier base rate reductions and while societies will want to help their saver members where they can, it will be difficult for them to ignore completely today’s announcement.”
Rathbone Unit Trust Management: “In some respects, the Bank of England has played it safe with a 0.5% cut,” said Julian Chillingworth, chief investment officer, Rathbone Unit Trust Management.
“Rates are now at a level [1.5%] not seen since the Bank’s inception in 1694. But these cuts will have little impact if they are not passed on to consumers. The main losers in all this are savers, who will continue to receive paltry levels of interest on their deposits in the foreseeable future.
“What is clear is that we are fast running out of ideas, and the quantitative easing (increased money supply) will create problems of its own. We expect the Bank to cut rates by another 50 basis points at its next meeting.”
FOR PENSIONERS
National Pensioners Convention: Joe Harris, NPC general secretary said: “Around 6m pensioners don’t really have sufficient savings to be significantly affected by the rate cut, but an average pensioner with £10,000 in the bank or building society has already seen their income drop by around £6 a week, and today’s further cut will only make the situation worse. What is needed is a real improvement in pensioner incomes, which can only be achieved by substantially raising the basic state pension.”
FOR MORTGAGE HOLDERS
Charcol Mortgage Brokers: “With most collars on tracker mortgages now operating (except Halifax, who were forced by the FSA to withdraw theirs) I estimate that 275,000 – 300,000 out of the approximately 4 million borrowers with a tracker mortgage will not benefit from today’s bank rate cut, or indeed any further cuts. Ironically, although tracker borrowers with Nationwide and Skipton will not benefit from today’s cut because of collars, borrowers with an SVR mortgage from both these lenders will receive the full benefit of the cut. This is because of a mortgage condition which stipulates that their SVRs will not be more than 2% and 3% respectively above bank rate. Nationwide’s SVR is currently 4% and Skipton’s is 3%. Borrowers on SVR with the two societies Nationwide has just taken over, Cheshire and Derbyshire, will also be beneficiaries of this policy.
“Three month Libor has fallen back to 2.57 per cent, the lowest margin above bank rate since March of last year. Some of this recent fall will have been in anticipation of today’s cut and the key to lenders’ cost of funds will be how much further it falls after today’s cut. The current range of SVRs is a huge 2.3% with First Direct at 3.69% and Scarborough at 5.99% and, as last month, I expect only a small minority of lenders to pass the full cut on to their SVR and some to not cut their SVR at all.”
“What should borrowers do now? The cost of fixed rate mortgages has only fallen very gently since last month’s one percentage point bank rate cut, despite swap rates falling to record lows. As an example two-year swaps are now at 2.5 per cent, whereas the cheapest two-year fixed-rate mortgage without a percentage fee is almost 1.5 percentage points higher at 3.99%. Fixed rates therefore still look expensive and trackers with a droplock option, but no collar, remain the ideal mortgage product in today’s market, although borrowers needing in excess of 75 per cent loan to value (LTV) will find very little choice, and none above 80 per cent LTV. The time to switch to a fixed rate may well come this year but we are not there yet. For specific individual advice borrowers should speak to an independent or whole of market mortgage adviser.”
Savills: Yolande Barnes, head of residential research at Savills, said: ”This further rate cut is unlikely to have an immediate positive impact on the mainstream housing market, either on activity levels or capital values.
”For months now we have been stating that the fundamental downward pressure on the UK residential market is the lack of mortgage availability, not the cost of mortgages or the affordability of homes. Only when liquidity returns to the lending markets, and there is a sense that the worst of the recession is over, will the market hit bottom. At that point, the combination of lower borrowing rates and falling house prices (anticipated to total -25 per cent from peak 2007 values) will combine to push housing affordability towards record levels, thus cementing the residential market upturn.
”However, while the impact for UK homebuyers will be minimal at best, the December cut triggered a devaluation of sterling, which has in turn stimulated serious international investor interest in prime central London, as low interest rates and falling asset values combine to make property look like a relatively safe haven once again. It is too early to state whether this is a trend that will continue, though overseas investors have traditionally been key to the market recovery, with the benefits radiating out from prime central London.”
Cluttons:,”With redundancies and unemployment on the rise, and consumer confidence in the economy at an all time low, this rate cut is unlikely to deliver a dramatic turnround in fortunes. It will help those homeowners on trackers and variable rates by making their home more affordable, but perversely, this can have a negative impact on transactions, as their homes suddenly become more affordable, making them less likely to sell.
”There are opportunities appearing as sellers face the reality of the market after the Christmas break, but even though property is becoming more affordable, the banks’ unwillingness to lend on reasonable terms means there is little chance of a significant improvement in the market. In reality, there are few borrowers who have spotless credit ratings and total job security, who are also able to afford 25-30 per cent deposits.”
Association of Mortgage Intermediaries: Robert Sinclair, AMI director, said: “The 50 basis point cut is recognition that there are still fundamental issues facing the economy, which the government needs to address. While not inconsequential, the committee’s decision will have little impact on the real problems faced by the mortgage market. In order to do so the Bank and the government must tackle the burning issue of a lack of liquidity. This is what now holds back the market and it will not be solved by a further cut in the base rate.
“It was heartening over the last 24 hours to see widespread agreement with AMI’s position that much more needs to be done urgently. We have consistently called for concerted action over the last nine months to address the underlying issues in the market.
“The government must fully implement the recommendations of the Crosby review of mortgage finance and ensure that sufficient funds are available for lenders. In addition the government should consider ways to remove ‘bad loans’ in order to restore confidence in the market place. AMI will continue to call for these urgent changes.”
Assetz: Stuart Law, chief executive of Assetz, said: “Continued aggressive interest rate cuts are inevitable, as the Bank of England’s dithering throughout the past year forces it into damage limitation over the length and depth of the recession.
“I believe rates could reach zero per cent by the summer, although borrowers should not expect their mortgage rates to go close to this level. As base rates tend towards zero, banks will be determined to build in higher profit margins than they have in the past.
“While many variable rate mortgages holders are benefiting from the Bank of England’s interest-rate changes, the rate cuts should also permit lower and lower long-term fixed rates to be released.
“All of the major banks need to start giving back to the consumer, now that they have taken the government handouts offered last year. They must do this by supporting homeowners and businesses with much higher levels of lending than seen in recent months.”
SmartNewHomes.com: David Bexon, managing director of SmartNewHomes.com, said: “Today’s decision by the MPC to drop rates to a historic low was widely expected, but it is likely to be greeted with minimal enthusiasm from borrowers, who have been left disappointed by the failure of lenders to pass on the full extent of previous rate cuts.
“Interest rates have come down significantly over the past three months but mortgage finance remains as limited and unaffordable as ever. Going forward in 2009, we need to see government measures put into practice that will stimulate the banks’ willingness to lend. Interest rate cuts will continue to have little effect until something is done to break the stalemate in the mortgage market.”
Marsh & Parsons: Peter Rollings, managing director of estate agent Marsh & Parsons, said: “Never look a gift-horse in the mouth, but the vast majority homeowners will never feel the benefit of this cut. Banks simply aren’t passing these cuts on. While it will have a positive impact on sentiment, vital at the moment, interest rates mean very little if you don’t have a large deposit – in London, house prices are still high enough that a 25 per cent deposit is a fortune for a first-time buyer.
“The base rate cut is a further step in the right direction, but if we’re to see even a mild improvement in the number of people able to afford to move home – the government must start acting to thaw the mortgage freeze. Banks can’t lend because they have no money to lend – the government promised us action in November. The action we’ve seen to date is simply not enough.”
Royal Institute of Chartered Surveyors: Simon Rubinsohn, RICS chief economist, said: “The decision to lower interest rates today to just 1.5 per cent, while welcome, is unlikely to provide any meaningful encouragement for banks to increase the availability of finance to either households or businesses. Indeed, the risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate. With many first time-time buyers unable to find the finance to take an initial step onto the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the government to take direct action to restore an orderly property market.”
“The gap between new buyer enquiries and the number of mortgage approvals is increasing. New buyer enquiries, according to the last RICS housing market survey (November 2008), are at their best level since October 2006, whilst the Bank of England’s mortgage approvals data in the same month sank to its lowest point on record
“Guarantees for the new issuance of residential mortgage backed securities (RMBS) as recommended by Sir James Crosby needs to be adopted as soon as possible. By removing the risk associated with wholesale lending through securitisation vehicles, government guarantees should inject some much needed confidence back into the RMBS market.
“Incidences of negative equity and the level of home repossessions will increase if potential homebuyers continue to be frozen out of the market.
“A further period of sustained weakness in the housing market could deliver a further blow to consumer confidence and, in the process, lead to a deeper recession in the economy than might otherwise have been the case.”
Council of Mortgage Lenders: Michael Coogan, CML director general, said: “This cut is a double-edged sword for retail based lenders. While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders’ ability to attract deposits and maintain the flow of mortgage lending in 2009.”
“The market is still not functioning properly and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to today’s announcement.”
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If you have any questions about how the interest rate cut will affect your personal finances, send them to ask@ft.com.
In a special live online Q&A at 3pm GMT Friday January 9, David Black, principal consultant on banking at Defaqto financial research centre, will share his views and answer your questions on the effects of the interest rate cut on savers, mortgage holders and creditors. See www.ft.com/black
