Afternoon:
7°c
Q&A
Robert Lea8 Oct 2008
It's been a dramatic day. What difference will it make to me?
Most importantly the Bank of England base rates is down by 0.5 per cent. This means that all homeowners on tracker mortgages — about 35 per cent of the total — will automatically see their repayments go down from next month. Typically by around £30 for each £100,000 of the mortgage. In addition homeowners on standard variable mortgages will also benefit. If, that is, their lender decides to pass on the Bank of England cut. So far, Halifax, Lloyds TSB and Barclays have done so but there is no guarantee that all the others will follow. Even so, around 4 million of Britain's 11 million home loan borrowers will be better off, of which about 500,000 are in London.
What about first time buyers?
They should see some more attractive rates on offer. But whether the banks will be any more eager to lend to them remains to be seen. In theory the measures announced today will make it easier for the banks to borrow in the City and therefore more willing to lend to first time buyers. However it may take time for banks to feel confident enough to start lending again to borrowers with only small deposits.
Will it stop property prices falling?
Not for a while. A best case scenario is that over the winter interest rates continue to fall, perhaps to as low as 3.5 per cent, and financial markets start to stabilise. That might, just might, persuade enough shell shocked buyers to go back into the market. There are an awful lot of young people who in normal times would looking to get their foot on the housing ladder. But they will take a lot of persuading that the bottom rung is safe.
How does Alistair Darling's bank rescue plan work?
The Chancellor is backing the UK financial system to the tune of £500 billion. Of that, £200 billion — to be paid back by the banks — is available in short-term borrowing to improve lending in the money markets. Another £250 billion is standing as a State guarantee of any longer-term borrowing that banks may need to do via bond issues. Then there is the £50 billion of taxpayers' cash leaving the Treasury to recapitalise leading banks in return for the Government receiving preference shares in these banks.
Recapitalisation? Preference shares? I thought this was partial nationalisation?
Where does this money come from?
You. £500 billion is equal to £20,000 for every taxpayer. The £50 billion immediately going into the banks is like a cheque for £2,000 from every taxpayer. The Chancellor will not be asking you to write a cheque for this amount but he will get it back in other ways: namely taxes. There is no guidance yet on where the Government's financial commitments to the banks will sit in the nation's books.
How strong does the Tier 1 capital ratio need to be?
It is understood the Government wants to see a ratio of 8 per cent. The likes of HBOS and RBS have a ratio in the range of 5.7 per cent to 6.5 per cent.
Which banks are getting the money?
Almost every name on the high street. Barclays. HBOS, which runs the Halifax. Lloyds TSB. The Royal Bank of Scotland, which runs NatWest. And — unexpectedly — the Nationwide, Britain's largest building society. The Spanish-owned Abbey, which also runs Alliance & Leicester and Bradford & Bingley, is yet to make its mind up. HSBC has said that it doesn't need the Government's cash.
How does it work?
The banks apply to the Treasury for the cash and negotiations begin on how much of a stake the taxpayer then takes in the bank.
And the £50 billion question: will
it work?
Who knows? We are in uncharted territory. The Chancellor and the Prime Minister believe it will work.
