It’s hold for now but inflation continues to be the key

Ray Boulger of John Charcol, UK Independent Mortgage Adviser, comments on today’s decision by the Monetary Policy Committee (MPC) to hold Bank Rate at 5.25%.

“Today’s decision probably resulted from another split vote and a 0.25% increase to 5.5% next month is widely expected by the market. However, this is far from a foregone conclusion, particularly in the light of the voting at last month’s meeting, where there was one vote for a cut and none for an increase. It is notable that it was Prof David Blanchflower who voted for a cut and, as he spends much of his time in the USA, he will be much more aware than the other MPC members of the potential damage to the US economy from the dire problems in their housing market, and the risk of contagion to our economy if the situation deteriorates significantly. The minutes of today’s meeting will be published on 18 April and the voting pattern will be of more interest than usual.

“Following the last three Bank Rate increases some signs of a slow down in the UK housing market are emerging, notably in the number of mortgage approvals, although in London and the South East the market is still strong, partly because of a shortage of properties for sale. However, this shortage is likely to disappear shortly as people put their property on the market prior to 1 June to avoid the cost of a Home Information Pack.

“There is no reason to expect the number of buyers to increase as a result of HIPs, but there will certainly be a short term spike in the number of properties coming on to the market over the next two months. A key question will be how many of these people “soft market” their property at an unrealistically high price until later in the year and then drop the price when they actually want to sell and how many actively market them initially at the right price.

“There will probably be vendors in both camps and so whilst it is difficult to know how much extra property will genuinely come on the market before 1 June, even a relatively modest amount will be sufficient in many parts of the country to mean there will no longer be a shortage of properties for sale and in some areas it will probably become a buyers’ market. Once this happens the psychology of buyers and sellers means that in most parts of the UK house prices will stop rising by any significant amount, activity will decline as there will no longer be the pressure to buy, and prices will become relatively stable in the second half of the year.”

What should borrowers do now?

Boulger continues: “The market is fully discounting one more Bank Rate increase and so this is already priced into most fixed rate mortgages. However, many borrowers will still prefer a fixed or capped rate for the budgeting certainty and consequent peace of mind they offer.

“As Bank Rate is probably close to its peak borrowers who don’t need the security or comfort of a fixed rate should consider a tracker mortgage, so as to benefit from any Bank Rate falls next year. However, there are some very competitive 2 year fixed rates on offer around 5%, including 4.99% with a £999 fee from Alliance & Leicester and for purchases only 4.89% with a £1,999 fee from John Charcol. These will still be good value even if Bank Rate falls back to 5%, but good two year trackers start even lower at Bank Rate – 0.81%, i.e. a current rate of 4.44%, although to get this rate there is a 1.25% fee. For borrowers who prefer a deal with no early repayment charges we can offer exclusive 3 or 5 years tracker mortgages just below Bank Rate and with a droplock option.”