Bank rate cut but no improvement

Thursday's Bank rate cut, regrettably, but unsurprisingly, had no helpful effect on lenders' cost of funding; although today's auction of £15bn has brought down slightly the 3 month LIBOR. Nonetheless, LIBOR, now the hoodie of the finance world, continues to loiter stubborn and high in relation to Bank rate; symbolic of a fallen system, where banks lack the confidence to step out of their houses to trade with each other. Charcol's Katie Tucker comments: "The connection between Bank rate and LIBOR (the rate at which lenders borrow money) has become elastic, and a pull on one end provides no effect on the other. Previous short-term cash injections such as this £15bn have merely brought temporary aid; what the government needs to do is restore the inter-bank lending and resurrect the confidence of investors in the mortgage backed securities. The new market will inevitably be a more robustly risk-assessed and risk-priced version of its former self. This means that borrowing at high loan-to values or with credit problems will never be as cheap as in the last two years; but the property market should regain health."

Tucker continues: "The idea of trading the lenders' stagnating mortgage-backed assets for Bonds, and discussion of a form of Kite-marking mortgage-backed assets to indicate their level of risk, indicates the government's acceptance of ownership of the problem. Conversely however, pleading with lenders to pass on rate cuts can have little effect; the price of money, like anything else, is dictated by supply and demand, and currently there are too many lenders working with too little money."

What products are available now?

"Lenders that have reduced their Standard Variable Rates, as well as the trackers for existing borrowers will in fact be netting less revenue now, and it is the new borrowers who are feeling the resultant pang imposed in their rates. Bank of Scotland has increased its rates by between 0.3 and 0.5, leaving 90% loan to value 2 year fixed rates at 6.79% up from 6.29%. Halifax has increased its two year rates by a huge half a percent, to avoid a glut of rate expirations in 2010. Lenders continue to ration their funds by risk: Abbey has reduced its maximum loan to value to 75% for loans between £500,001 and £1m. Charcol has a semi-exclusive 2 year fix at 5.79% with a £598 fee, that comes with free valuation and legals on remortgages, as well as overpayment and underpayment flexibility."

Tucker concludes: "Mortgage deals can't be expected to live for more than four days now, but brokers receive a few hours advance notice of the product closures, and can secure money on the rate a client may have been quoted for, before the deal is re-priced upwards. That heads up has been the saving grace of many remortgagers this week."