High inflation puts the brakes on needed rate cut program

As well as increasing the eligibility for the Government Homebuy schemes beyond key workers, and out to any first time buyers with household income of less than £60,000, the government has made £200m available for purchasing shares of unsold new homes for social tenants or shared equity schemes.

Charcol's Katie Tucker comments: "The extended eligibility criteria will allow more first time buyers to buy a part share in a property, because, at least for the MyChoiceHomeBuy, several lenders can offer 100% of the share that is being bought so no deposit is needed. However, the administration with the Homebuy schemes has been notoriously slow and complicated, many applicants find that a mortgage plus rent option is more expensive than renting or buying, and of concern with the New Build HomeBuy is the risk of new builds losing value."

The Bank of England has reported that consumer inflation is expected to exceed the 2% target by more than 1% well into 2009. Tucker comments: "When Mervyn King heads off to his letter-writing bureau, you know the MPC's tack has changed, and they are no longer able to reduce bank rate rapidly enough to stimulate growth, or the money markets in the way they would like. The Bank of England is now in a Catch 22 situation: leave Bank rate where it is and the mortgage lenders, who are sorely needed to keep the property market healthy, are unable to source cheap enough funds to lend out at affordable rates; cut Bank rate, and inflation rockets. If the ongoing program of Bank Rate cuts is slow, so will be the recovery, however, if slower cuts results in more cuts being needed, homeowners on longer term trackers could potentially be the winners, and see their payments steadily reduce by a percent and a half by the end of 2009."

New mortgage lending, however, has reached its lowest in 3 decades. Tucker continues: "This generation has grown up in a culture that scrambles frantically to get on the property ladder as soon as possible. Yet suddenly, first time buyers, and indeed those trading up, are faced with an increasing risk of negative equity, combined with mortgage rates so high, that they have cause to stop and consider whether this is the right time to commit to such a debt. However rates have been improving for those with a big deposit. Prospective buyers should take advantage of the high savings rates on offer while banks and building societies are competing for depositors, and start squirreling cash away. Homeowners that can reduce their debt by overpaying as much as possible, will have a much better choice of remortgage deals later."

What products are available now?

This week Alliance & Leicester has joined top lenders including Halifax, Abbey and Nationwide in pricing deals higher for borrowers with less than a 25% deposit. Tucker continues: "Alliance and Leicester has reduced its 2 year tracker to 5.89% for those with a 25% deposit, but increased it to 6.39% for those with any less, a penalty of £62 more interest per month for the same £150,000 mortgage. For those who want to take advantage of a sub 6% fixed rate, Nationwide has a 2 year fixed rate at 5.95% with a £599 fee up to 75% Loan to value (6.15% for 90% LTV). However, Lloyds TSB has a 5.84% three year fixed rate exclusively through large brokers, available up to 80% LTV for a £499 fee, with free valuation and legals on remortgages."