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Mortgage bills will drop as 1% interest rate cut predicted
Jonathan Prynn and Mira Bar-Hillel01.12.08
Mortgage bills for hundreds of thousands of London homeowners are set to be slashed again this week.
Most City economists are convinced the Bank of England will cut its official base rate by another full percentage point to a record-equalling two per cent on Thursday.
It follows the publication this morning of another slew of desperately gloomy economic figures, showing that the recession is gathering pace and the housing crash shows no sign of stopping.
A full-point cut from the Bank's Monetary Policy Committee would bring welcome financial relief in the New Year for the estimated 600,000 Londoners on tracker mortgages that are linked to the base rate.
The base rate was last at two per cent in November 1951 and has never been lower since the founding of the Bank of England in 1694.
Howard Archer, chief European and UK economist at forecasters IHS Global Insight, said: "We believe there is an even stronger chance now that the MPC will deliver a 100 basis point (one per cent) cut, taking interest rates down from three per cent to two per cent. We expect interest rates to fall to one per cent in the early months of 2009 and then stay there for the rest of the year."
For a typical £200,000 London tracker mortgage, a one per cent cut would mean a saving of about £106 a month from 1 January. It would follow November's 1.75 per cent reduction, which took effect for tracker mortgage holders today.
It will also bring fresh pressure on major lenders - particularly those part-owned by the taxpayer - to cut their standard variable rates.
However, there are few signs that conditions for first-time buyers with small deposits are easing. Ray Boulger, senior technical manager at brokers John Charcol, said: "If your loan to value is more than 75 per cent you are still out in the cold because the rates have not come down."
The Bank today revealed that October mortgage approvals were close to all-time lows at 32,000, slightly down on September.
As recently as June last year banks were giving the green light to 115,000 home loans a month. Net lending after mortgage repayments are taken into account was just £500million.
Economists said the weak lending figures pointed to further sharp falls in property values over the next year.
Reader views (6)
In response to james of London:
What an ignorant and stupid comment......there are no high yields around the world without taking huge risks.....what planet is he living on?
Unless you want to risk everything in an attempt to obtain 4.9% which is probably unrealistic given the present market conditions around the world.
The majority of pensioners rely on savings interest to get by and pay their bills, so to simply say "tough luck" is absolute ignorance.
James no doubt is only thinking of himself and his mortgage and is not looking at the overall wider picture.
Quite simply the banks should be nationalised and the government should get loans moving into businesses without further delay. That is what MIGHT sort this global problem, not James with his selfish attitude. That is what got us into this mess in the first place.
- Self Employed Accountant, Glasgow Scotland
If the point of cutting interest rates is to lower mortgage bills, it's not really doing the job it's meant to. I have a tracker mortgage with Alliance and Leicester - and since the last rate cut I've yet to receive any communication that my mortgage will be reduced accordingly. So I've lost faith that the banks will reduce mortgage rates even if interest rates fall.
- Jt, London, UK
Well after the last rate cut of 1.5% Firs Direct have cut my mortgage rate to 4.69%, a market leader apparently. Whilst the rate cut is welcome, even if it will take effect a whole month after the BoE decision, they've only reduced it by 0.81% so I'm not sure how much I will get out a of 1%!
If anybody thinks I will be spending the extra £ 100 per month in the High Street then think again. My investment, which i had planned to pay-off part of my mortgage with, have taken massive hit in the last few months so the £ 100 will be going back to first Direct as increased capital repayments.
- Mark, South-East London
Falling interest rates are not bad news for savers - if they look further afield for a yield. But, people being people, are paralyzed by inertia and fear. And savers are no exception. There are many opportunities around the world that offer safe and reliable returns. But British savers are so afraid of the unknown, they will willingly watch their savings eroded by inflation. Tough luck!
- James, London
One spin off from the reduced mortgage rates ... tax receipts from Buy to Let properties will go up.
- Marke, Houston, Texas
As usual the savers will bear the burden of the recession. That would be ok if interest rates were increased to 10% plus at a time of 20% annual house price increases.
If the possibility of much higher interest rates did exist. We would not be perpetually going through boom and bust cycles, as it would not be allowed to happen.
- Harry H, London UK
