Pause before bi-monthly rate cuts resumed

"The MPC's decision to leave Bank Rate unchanged this month was widely expected, despite conditions continuing to deteriorate in the mortgage and property markets," comments Ray Boulger of leading independent mortgage adviser, John Charcol.

"This pause in the programme of rate cuts will allow the MPC time to assess the impact of its Special Liquidity Scheme available to Banks and five Building Societies before deciding on the scale and timing of further cuts. So far the impact on 3 month Libor has been fairly muted, although the rate has edged down to 5.79%, the lowest since Bank Rate was cut to 5% last month. This compares with the recent peak of 6.01% but the Bank Rate/3m Libor spread remains exceptionally high.

"Recent commodity price increases will have raised further concerns about the Consumer Price Index (CPI) breaching the sacred 3% barrier in the next few months, but with companies coming under increasing pressure to cut costs, the danger of wage inflation adding to the overall inflation rate appears to be diminishing. Furthermore, with the housing market being such a major influence in the UK economy, the deflationary impact of housing transactions running about 40% lower than last year, combined with falling house prices, will mitigate the increase in inflation and help reduce it later this year.

"Despite early signs of some confidence beginning to return to the capital markets, following a reassessment of risk after the Fed's bale out of Bear Sterns, availability of mortgage funding remains very tight, with lenders adopting various methods, in addition to pricing, of restricting demand. This includes monthly quotas. The fact that some lenders, including the daddy of them all, Halifax, have even resorted to refusing to accept applications for a new mortgage on their Standard Variable Rate (SVR) because it has become too competitive just about says it all!"

So what should borrowers do now Ray?

"At this stage of the interest rate cycle trackers normally make most sense for borrowers who don't need or want the protection and security a fixed rate mortgage offers. However, because lenders generally have increased tracker margins above Bank Rate by more than they have increased fixed rates the choice is not so obvious at present. Anyone who believes Bank Rate will average no more than 4.5% over the next few years and is prepared to back that judgement will probably favour a tracker, but at present the majority of borrowers are choosing fixed rates.

"Just as important a consideration is how long to lock into a deal for. With lenders' margins over the cost of funds at unprecedented high levels there is a good argument for not locking into a deal for too long, but this has to be balanced against the risk that conditions in the mortgage market will deteriorate further and that it may be difficult to obtain a better deal in the short term. An ideal compromise would be a long-term deal, perhaps a lifetime tracker, with no early repayment charges, but few lenders still offer such deals. As an alternative a three year deal should be long enough to see conditions in the mortgage market better than those of today, even if they have not returned to normal by then."