The Bank of England has launched a new scheme to make more money available to homeowners. This has been made possible by the Bank of England lending money to Financial Institutions at below market rates. Under the initiative, lenders will be able to exchange existing loans for pieces of paper known as treasury bills, and they will pay an interest rate of 0.25%. They will then be able to use these bills as backing to borrow cheaply on wholesale markets. Although, this very cheap money has been criticised as just an interest rate subsidy for the banks, which will not necessarily increase the volume of lending, there are some early signs of this money being in the system. Nationwide Building Society reported last month that house prices declined 2.6% year on year which was the biggest annual fall since the summer of 2009, so this fillip could not come at a better time, with £80bn being allocated to lenders, with the money available over 4 years.
With this stimulus in place, it appears that lenders are majoring on long term fixed rates with some lenders cutting five year fixes to below 3%. These are around 1% lower than the rate before the cash injection from the government, and they are the cheapest long term home loans ever offered to borrowers in the UK. However, people with existing mortgages with some lenders such as Nationwide, Cheltenham & Gloucester and Lloyds may have the benefit of old style variable rates that are linked to the bank rate. These rates are currently at 2.5% with no tie in and the people with these rates, are less likely to consider switching to a fixed rate as long as their rate does not rise. But other borrowers, with variable rates in excess of 3%, may wish to consider switching to a long term fixed rate, as the payment could be lower, and they get the added security of certainty of rate thrown in. There could be a lot of people in this bracket as outside of the lenders with low variable rates that I mentioned earlier, most other lenders have long term variable rates of 4% plus. Also as mentioned before, fixed rates were around 4% until recently so there was little incentive to switch until now.
Unfortunately, I believe these low rates will not last, as I think lenders feel obliged to grab the headlines with the scheme having just been launched, and I expect to see the rate creeping up a little when the scheme is no longer in the spotlight. Also, I feel that the scheme is missing the target market as most of the cheap borrowing rates are targeted at people only needing to borrow 60% of the value of their property. I would have thought lenders armed with these massive incentives from the government would be able to dip back into the first time buyer, 95% mortgages, as I think that only when this segment of the housing market starts to move more normally, can the housing market and in turn, the wider market, start to show signs of recovery.
Kieron Bassett Financial Services have two Independent Financial Advisers who specialise in mortgages. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
20th August 2012
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