Mortgages in the UK December 2008

We are rapidly heading towards the end of a year many in the mortgage world will want to forget. To celebrate this year of extraordinary events the Bank of England have decided to lower the Bank of England base rate to 2%, a rate not seen since 1951. This is also equal to the lowest rate seen since the creation of the Bank of England in 1694.

If we are to believe what the commentators say, we should be heading down to a Base Rate of 1% in 2009 - totally new territory for everyone in the UK – as the Government tries to fight the UK’s current economic plight.

It all seems counter intuitive to many people – if the economy has got into this position because of the availability of cheap credit - then to offer record equalling cheap rates seems like madness. However, most lenders are not really in the mood to lend, so whilst rates are cheaper, credit is generally hard to get.

The Banks’ balance sheets have been trashed by their exposure to losses in the US sub-prime market. After the Government’s injection of cash into the banks, it is in all our interests (as we now own part of most major banks in the UK) for these banks to start to make profits rapidly. These profits will create a large tax take for the Government (and therefore us) and will also lead to the raising of bank share prices (which once again is good for the Government and us, if they subsequently sell the shares back into the market).

The problem facing the Treasury, the Bank of England, the FSA and the boards of these banks is to get the balance right between improving balance sheets and, improving the rates available to borrowers. Cheaper mortgage rates will stem the falls in house prices (unless unemployment grows substantially) and fuel a spending boom which will in turn allow the economy to come out of recession faster. Meanwhile the papers continually castigate the Banks if they do not pass on the full base rate cuts to borrowers. They don't spare a thought for the savers whose income is generated from their savings within the same banks -savers are now suffering badly.

The problem in the housing market can be improved, not by dropping new mortgage rates to the lowest in history, but by making reasonably priced mortgages available at 90% or 95%. Currently the very few 90% ltv products on the market are at around 6% (4% over base) and there are no 95% loans to be seen.

This lack of more affordable products is stopping first time buyers come to the market unless they have a 15% to 20% deposit.

We believe it is important for the Government to put pressure on the lenders to make higher loan to value mortgages available. This will encourage borrowers to have faith in the fact that house price falls are coming to an end and, that they can afford to venture into the property market and not expect to make much of a loss