Rate cuts take the pressure of borrowers, but the relief is slight
In the first piece of good news for mortgage holding homeowners for many months now, mortgage providers have today been lowering the cost of their home loans following the emergency cut in
UK interest rates.
Halifax said it would be reducing its standard variable rate (SVR) from 7% to 6.5% from 1 November. Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, said it would cut its SVR by half a percentage point to 6.5% on the same date. Woolwich and First Direct, part of HSBC, have also cut their SVR’s by half a percentage point.
However, experts say that house prices will fall despite the respite for homeowners and therefore negative equity remains a threat.
The Council of Mortgage Lenders issued a statement, part of which reads, ‘all this decisive action augurs well for an improving market situation looking ahead, even though no one is pretending the tough times are over yet.’
Roughly 7% of mortgage holders have a SVR mortgage so the effects of this rate cuts will be limited.
The rate cuts came after a co-ordinated move in which the Bank of England along with five other central banks, cut interest rates by half a percentage point to 4.5% earlier today.
The Bank rate cut will offer relief for a third of the 11.7 million UK households with a mortgage, as they are on existing tracker mortgages. The financial website moneysupermarket.com estimated that a family with a typical £150,000 mortgage will be more than £40 a month better off, a saving of almost £500 a year.
But rates for savers are likely to be cut by some providers because of the latest news. National Savings and Investments (NS&I) said it was cutting the returns paid on its ISA following the fall in the official cost of borrowing.
Government-backed NS&I said interest paid on its Direct ISA was being reduced from 5.3% to 4.8%.
The CML have also pointed out that actions taken today, including the rescue plans for the banks, are likely to arrest the decline in the availability of mortgages.
The cut in the Bank rate came after falls in recent days in the Libor, the rate at which banks lend to each other and key to mortgage costs.
The effect of the credit crunch is most acutely visible in the fact that the average five-year base rate tracker mortgage is now 1.07% higher relative to the bank base rate than it was back in July 2006.
Experts have warned that the modest rate cuts announced today could lull borrowers into a false sense of security. Although today’s news will clearly help those with repayment difficulties, borrowers who think they might encounter problems repaying their mortgage should still get in touch with their lender as soon as possible.
Mortgage payment problems are expected to become more commonplace if homeowners start to lose their jobs. As unemployment rises here in the UK these problems are only going to get worse.
The Royal Institution of Chartered Surveyors (RICS) has forecast that UK unemployment will soon rise above two million.
With the markets sliding relentlessly downwards despite the best efforts of governments and central banks it shows that actions as dramatic as today’s are simply keeping economies around the world from the abyss of total meltdown. Recovery itself is a long, long way away.
