Rate hold costs UK’s mortgage holders £105 million a month

“The fact that the MPC were unanimous in their decision to cut Bank Rate 0.25% last month, after seriously considering a 0.5% cut, was a strong early indicator that another cut this month was on the cards. Add to that various negative economic statistics over the last month plus an increasingly worrying economic outlook later in the year and it is easy to see why a 0.25% cut today would have been justified. We estimate the MPC’s failure to cut Bank Rate this month will cost UK homeowners with a variable rate mortgage about £105m per month in mortgage interest payments.” says Ray Boulger of leading independent mortgage adviser, John Charcol.

“Despite some further bad news on the inflation front, in particular the Npower price increase of up to 17%, CPI is still only just above the central target of 2%, although a modest further increase over the next few months is probable. However, looking further ahead the deflationary impact from economic slowdowns in other Western markets, in particular the USA, coupled with a slowdown in the UK, means that the CPI is likely to fall back later in the year and in the current financial environment it is even more important than usual for the MPC to look beyond the short term inflationary outlook. If the MPC delays the next cut too long Bank Rate may have to fall further than would have been the case with an earlier cut.

“Despite no change in Bank Rate there is nevertheless some good news for borrowers looking for a fixed rate. The Bank Rate / LIBOR spread has narrowed sharply over the last couple of weeks, as has the gilt-yield / swap rate spread, albeit to a lesser extent, and this is an encouraging sign for an easing of the liquidity squeeze. Because swap rates have fallen sharply over the holiday period, to around 5%, borrowers who prefer a fixed rate mortgage should see lower rates soon, although so far few lenders have reduced their fixed rates to reflect these lower money market rates.”

So what should borrowers do now Ray?

“Trackers still make sense at this stage of the market cycle for most borrowers. Nationwide’s flexible 2 year tracker for purchases only @ Bank Rate + 0.08% with a £599 arrangement fee has the additional benefit of a ‘droplock’ facility, which is ideal in this climate for those borrowers who would like the option to switch to a fixed rate when the timing seems appropriate. For borrowers happy to take a longer term view John Charcol can also offer a flexible lifetime tracker at Bank Rate + 0.38% with a £995 fee, no early repayment charges (ERCs) and on remortgages a free valuation and free legals. As this mortgage has no ERCs borrowers have the option of switching to a fixed rate if and when they wish with the same lender, or remortgaging if an alternative lender offers a better value fixed rate. As mentioned above the really good news for borrowers who need or prefer the security of a fixed rate is that after the recent sharp drop in swap rates I expect to see several lenders offering cheaper fixed rates over the next few weeks.”