It's another hold for bank rate with many more to come

"The MPC's decision today to leave Bank Rate unchanged for another month was really the only possible conclusion and the committee probably spent more time discussing the Quantitative Easing (QE) programme than whether to change Bank Rate. With the £125bn already committed to QE by the MPC due to be spent by the end of this month but bank lending, especially for mortgages, still woefully inadequate, considering whether to utilise the final £25bn approved by The Treasury was probably a key part of the discussion," comments Ray Boulger of leading UK mortgage broker John Charcol.

Boulger continues, "Another important consideration, particularly bearing in mind there is no UK history of QE to learn from, was probably whether to ask The Chancellor to increase the size of the QE facility. A strong argument for doing so would be to enable the MPC to have some ammunition available next month, should it decide to use it, to avoid the committee running out of options by the end of August if it considers further easing is still required.

"A clear indication of the distress in the mortgage market can be gleaned from a comparison of the movement in swap rates over the last month with the change in the cost of most fixed rate mortgages. Taking the 5 year market as an example the rate for 5 year swaps fell from 3.76% on 8 June to 3.49% on 8 July, having peaked at 3.83% on 11 June. However, the cost of fixed rate mortgages rose steadily throughout June and has not fallen back since. There was a whole raft of 5 year fixed rates available well below 5% at the beginning of this period but most are now well above 5%.

"For example at the beginning of this period Britannia offered the market leading 5 year fix, with a rate of 4.44%, a fee of £1,149 and a maximum LTV of 60%; their rate today for the same deal today is 4.99%. Likewise Northern Rock and Abbey both offered 5 year fixes at 4.69% with a £999 fee a month ago, the former to 65% LTV and the latter to 70%, but today the comparable rates from these lenders are 5.29% and 5.79%, although the maximum LTV on the Abbey fix is slightly higher at 75%. Similarly Nationwide's cheapest 5 year fix has increased from 4.78% with a £995 fee and a maximum LTV of 60% to 5.68% for an identical deal today.

"Thus over the last month spreads on 5 year fixed rates over the cost of funds have increased by about 1%. This is not a sign of a healthy market. Activity in the property market is historically still very low but mortgage lenders have struggled to satisfy even the small increase in demand resulting from the recent modest increase in purchase activity. Fixed rates were initially increased a month ago to reflect an increase in swap rates but have since not only not fallen back in line with swap rates but have risen further as lenders respond to increased demand by pushing rates up even more to deter business. This of course has the welcome benefit for lenders of increasing gross margins, which were already the highest they had enjoyed for years."

What should borrowers do now Ray?

"As early signs of some recovery in the economy are now looking less certain the likelihood of Bank Rate remaining low for longer is increasing, whereas the medium and long term fixed rate markets are now discounting a relatively early increase in rates. There has been little change in the cost of tracker mortgages over the last month and as a result the initial gap between the cost fixed rate and tracker mortgages has widened considerably. For anyone who believes Bank Rate will remain low, say under 2%, for at least 3 years there is now a strong argument for considering a tracker mortgage in preference to a fix, ideally retaining the ability to switch to a fixed rate if rates on fixes fall back. This will mean either buying a tracker with no, or low, early repayment charges (ERC) or one which offers a droplock option, allowing a switch to a fix without incurring the ERC."