More rate cuts are needed say lenders

Published on Saturday 11 October 2008 00:34

Some mortgages have come down but more needs to be done, finds Peter Ranscombe

MORTGAGE lenders last night warned that more interest rate cuts would be needed to restore consumer confidence, following a roller coaster week in the world of finance.

The Council for Mortgage Lenders (CML) welcomed the half-point cut in the Bank of England’s base rate – which was announced by Gordon Brown, the Prime Minister, on Wednesday – and the 50 billion that the UK government pumped into British banks.

However, new figures released yesterday revealed the number of mortgage products available had fallen to its lowest level since the start of the credit crunch.

Michael Coogan, director-general of the CML, which represents around 98 per cent of UK lenders, said: “All this decisive action augurs well for an improving market situation looking ahead, even though no-one is pretending the tough times are over yet.”

But more action appears to be needed to help the council’s members borrow more money on the open market and cut rates to hard-pressed borrowers.

A spokeswoman for the CML last night told The Scotsman: “The reduction in base rates this week was a useful start, but we are likely to need a series of rate cuts in coming months to restore consumer confidence.

“We also need to see the measures announced by the government this week begin to improve liquidity and confidence in financial markets. This would improve funding to lenders and enable them provide more mortgages to consumers.”

Her comments came after figures showed that the price of some mortgages had started to fall last month – but following the cut in the base rate, some lenders had withdrawn tracker products for new customers.

The average cost of a two-year fixed-rate mortgage for someone borrowing 75 per cent of their home’s value dropped from 6.08 per cent to 5.93 per cent during September to reach its lowest level since March, according to the Bank of England.

The outlook for the mortgage market continues to be “mixed” according to experts at Moneyfacts.co.uk, the financial information website.

Moneyfacts yesterday said the number of mortgage products on the market had dropped to 3,281 – the lowest number since the start of the credit crunch.

Darren Cook, a mortgage expert at Moneyfacts, said: “Ten lenders – including Halifax, Woolwich, Cheltenham & Gloucester and Royal Bank of Scotland – have been quick off the mark in announcing that they will be passing on the full 0.5 per cent cut in their standard variable rates (SVRs).

“With an increasing number of customers on SVR, due to the lack of deals this will be a welcome relief.”

But he added: “Amid continued turmoil within the financial markets, mortgage providers are continuing to withdraw their higher loan-to-value products from the market. Only 3,281 mortgage products are available today, the lowest number we have witnessed since the onslaught of the credit crunch.

“Choice may be reducing, but there are still enough products out there for borrowers to try and find a suitable deal that suits individual circumstances. The difficulties lie in the lack of liquidity within the market and providers having no appetite or being unable to lend on a larger scale. In essence, the price list shows that mortgages are getting a little cheaper, but the stock rooms are currently nearly empty.

“During the mortgage boom, products were driven by pricing and there was minimal margins attributed to risk or probable default. We now see that the market is becoming largely risk-driven, which is evident from the demise of many products with loan-to-values of between 95 and 90 per cent.”

As well as the good news for those on some SVR mortgages, mortgage experts said there was relief for some customers with “trackers”, which charge interest at a rate pegged to the Bank of England’s base rate.

Louise Cuming, head of mortgages, at moneysupermarket.com, the price comparison website, said: “Around a third of borrowers – approximately four million people – with mortgages that track bank rate reaped immediate rewards. For example, those with an existing 200,000 tracker deal could see their monthly payments fall by around 700 a year.”

But Cuming sounded a word of caution, relating to new customers taking out trackers.

She said: “Those hoping that the banking bailout would signal an era of cheaper borrowing should think again as Cheltenham & Gloucester used the rate cut as a prompt to withdraw some of its most competitive trackers. And Abbey has said that it is not re-pricing trackers for new customers because wholesale funding costs remain high.”

Cuming added: “Many borrowers are likely to be drawn to variable rate deals as most economists believe this month’s cut in bank rate is the first in a series – some think Bank rate could fall to 3.25 per cent next year.”