Now the start of many months of bank rate stability

Ray Boulger of leading UK mortgage broker John Charcol comments, "After a record run of six months of cuts, today's unchanged bank rate decision was widely expected after Mervyn King's comments last month on the very limited benefits of any further cuts. Borrowers with tracker mortgages priced below Bank Rate can expect to continue paying little or no interest for most or all of the rest of this year, or until the end of their deal, whichever comes first."

What now for the housing market?

Boulger continues, "There has been more positive news for the housing market over the last month, such as Nationwide's March house price index and the February mortgage approval figures from the Bank of England. Only yesterday HSBC's attempt to liven up the market for first time buyers and others with only a 10% deposit with its re-entry into the 90% LTV market gave further hope to borrowers. But monthly statistics are often volatile and there is still a long way to go before we see a sustained recovery, although there are increasing signs that confidence is returning to the housing market and the overhang of unsold new build flats is steadily being eaten away, albeit only by various forms of aggressive discounting.

And for borrowers?

"Borrowers with tracker mortgages should take advantage of the windfall cut in their mortgage payments by using at least some of their extra spare cash each month to pay down their debt, starting with the most expensive, or putting the money in a savings account, depending on their individual position. The priority should be to pay back any debt more expensive than the main mortgage, which probably means any second charge mortgage, credit cards or unsecured loans. After that the mortgage should be reduced, subject to being able to do so without incurring an early repayment charge, unless the pay rate is so low that a better net of tax return can be obtained from a savings account. For example there is no point in overpaying a mortgage on which no interest is being paid until the rate goes back up. The cash should initially be put into an instant access savings account and then withdrawn and used to reduce the mortgage when the cheap rate finishes."

Bank of England now buyer AND seller of gilts

Boulger continues, "With the start of the quantitative easing programme last month we now have the rather peculiar situation that The Bank of England is both a huge buyer and seller of gilts. The record Government funding programme continues alongside major gilt repurchases, sometimes of similar stocks. Analysing the gilts the Bank has sold successfully and those they have struggled to sell, and likewise which type of gilt investors have most wanted to sell back to the Bank, is instructive. The only gilt auction to be undersubscribed was the attempted sale of £1.75bn of 40 year fixed rate stock, whereas the next offer was of 13 year index linked stock and this was heavily oversubscribed. In the same vein when the Bank offered to buy back long dated fixed interest stock investors offered it far more than it was prepared to buy.

"A clear pattern is emerging here. Buyers are queuing up to buy index linked stock but are nervous about buying very long dated fixed interest stock. They are also clamouring to sell fixed rate long dated stock back to the Bank at any opportunity. The only rationale for this behaviour is that investors are now very nervous about the future inflationary risks building up as a result of the current policy of "printing money", even if it is electronic money. This is a very clear warning sign of the dangers to borrowers of sitting on a variable rate mortgage for too long or of buying only a short term fixed rate such as 2 years. The safest course of action is to buy a 5-10 year fixed rate, although the state of the economy is so bad that there is probably a window of several months in which to do this."

What is the impact quantitative easing on the price of fixed rate mortgages?

Boulger concludes, "So far very little and this is because swap rates have in most cases actually risen over the last month, despite rates for five years and longer initially falling by up to 0.3%. Comparing yesterday's closing prices with those of March 4, the day before last month's MPC meeting, 2 year swaps are down by 0.03% but 3 - 9 year rates are all up, with the 3 year rate up by 0.10%, 5 years by 0.18% and 7 years by 0.10%. The 10 year rate is unchanged and longer term rates are marginally lower. This suggests that, although rates may not rise significantly for several months, fixed rate mortgage pricing is already close to its low for this cycle."