Inflation risk remains high, delaying further bank rate cuts

“Last Thursday’s rate reduction was no surprise and was sorely needed to continue to ease the liquidity crisis that UK lenders currently face”, comments Katie Tucker, Technical Manager for Charcol. “However, inflation risks remain high as a result of fuel and utility prices, which means that the Monetary Policy Committee (MPC) will not be able to use Bank Rate reductions as a relief strategy again for a while now. As slower, non-consecutive bank rate reductions have a lesser effect, this may bring the bank rate as low as 4%, but not until the start of 2009.

“Utilities are currently the predominant cause of rising inflation and rent has not increased significantly in the last year, so it is homeowners who are inevitably experiencing a higher rate of real inflation than anyone else. Because of the amount of people on fixed rates, even Bank Rate reductions actually only bring immediate relief to less than 45% of homeowners. Thankfully for homeowners on their lender’s standard variable rate (SVR) or SVR discounts, 9 of the top 10 lenders passed on the full 0.25% cut to their standard variable rates (SVRs) immediately the Bank Rate cut was announced. Whilst this is often a significant minority of bank or building societies’ customers, it allows the MPC’s actions to ripple down to the spending public, and replenish the economy..

“Of further concern to first time buyers, already pushed out of the market by lenders restricting their criteria and withdrawing high loan to value products, will be the stimulation of the buy to let market as a result of an increased rental demand of those unable to buy. As rental yields improve, demand will decrease stock available to first time buyers and deposits will be harder to save as rental costs stay high.”

What products are available now?

Tucker continues: “Many of the best rates are with smaller lenders who choose not to publicise their products too widely in order to maintain customer service levels, which would suffer if a high number of mortgage applications suddenly came in. Borrowers should therefore keep an eye on the best buy tables of whole-of-market brokers and apply for the remortgage 6-8 weeks before it needs to complete.

“As Bank rate is expected to fall, albeit slowly, trackers are still the preference of the day and mortgages with a droplock facility or no early repayment charges (ERCs) will allow borrowers to switch into a fixed rate should they improve later in the year. This week, Marsden Building Society has the lowest ERC–free, two year discount at 5.64% for a £649 fee. National Counties has the most competitive 5 year tracker with ERCs at 5.14% for a fee of £395.

“Unlike new tracker rates, swap rates do currently reflect the market conditions (currently 4.95%) so there are some good fixed rate deals available to those who prefer the security of planned budgeting. First Direct has a 4.75% 2 year fix with a £1,498 fee, and a 4.99% five year fix for a £598 fee, both of which have a full offset facility. Yorkshire Building Society has a 4.89% two year fix for a £995 fee which includes free valuation and legals on remortgages.”