The Bank of England fiddles while the economy burns

“Conditions in the mainstream mortgage market are now rapidly deteriorating at a frightening speed, with lenders changing their pricing and/or criteria at the fastest pace in living memory, and probably ever.” comments Ray Boulger of John Charcol.

“The global liquidity squeeze not only shows no sign of abating, but has got worse over the last month, with 3 month Libor increasing from 5.59% immediately before February’s 0.25% Bank Rate cut to 5.77% now. The Bank Rate/Libor spread has widened from 0.09% to 0.52% in just a month.”

“The longer the liquidity squeeze continues the further ahead lenders must assume they will be constrained in the availability of funding, but they still have to meet loan maturities. Even though many lenders have reasonable access to short term funding from the money markets some long term funding is essential to successfully manage a mortgage lender, as Northern Rock found out to its cost.

“While the availability of money market funding remains constricted lenders are likely to rely increasingly on retail savings. As the margin over Bank Rate for new tracker mortgages continues to increase, and lenders struggle to meet demand, it becomes increasingly viable to bid up savings rates. Pre 1983 the building societies cartel controlled mortgage rates and kept them artificially low, meaning that savings rates were also too low. In today’s very different market it would make sense for lenders to increase savings rates even further to generate additional funds and also increase mortgage rates even further until something closer to a balance between supply and demand is achieved. If this happens on any scale the Bank of England would have to cut Bank Rate aggressively just to compensate for the increased margin over Bank Rate at which new mortgages were priced.

So what should borrowers do Ray?

“As lenders change rates increasingly quickly, with most new rates higher than the ones they replace, borrowers who want to remortgage should start to investigate their options as much as 6 or 7 months before their current deal ends, because some mortgage offers are valid for 6 months, although others only last 3 months. Those considering buying a new property should first check with a good independent or whole of market broker what mortgages are available, not least in case the tightening of lenders’ criteria over the last few months means that their expectations in terms of what is available to them cannot be achieved.”