Bank Cuts Base Rate To 5.5%

The Bank of England has cut the base rate to 5.5%. This will be greeted by a huge sigh of relief from everyone from home owners to business owners.

The Monetary Policy Committee, who set the rate, probably came to the conclusion that leaving the rate unchanged would in the end have caused more harm than good. Some of the hawks in the MPC may feel that their hand has been forced as there has been a huge amount of hype over the interest rate in the past few days.

In what was one of the most awaited announcements, the Bank cut the rate by a quarter of a percent from 5.75%, down to the level last seen in June. MPC members had to take into account the risk to the economy that would have been posed by leaving the rate alone. Their decision means that their fears for the economy outweighed their current concerns for inflation, which currently stands at 2.1% and is widely forecast to go higher in the next couple of months, with food and oil prices on the rise.

Data this week showed that house prices were down, according to the Halifax and consumer confidence has plummeted. Although in themselves the house price figures would not concern the MPC, it is what they say about the state of the economy that would trouble them.

A cut in interest rates may help boost consumer spending in the crucial period for retailers – the run-up to Christmas. People who will benefit immediately are those with mortgages that are tied to the base rate, i.e. tracker or discounted mortgages. Those on fixed rates will see no change to their monthly repayments – and most mortgages are fixed these days. It might bring some relief to those who will looking to remortgage next year when they come off cheap fixed rate deals – the pain may not be as great now.

It is unlikely that mortgage lenders will pass on the cut in full where they don’t have too, but savers may take the full brunt of the 0.25% cut. Some savings houses were already cutting rates.

The cut will be seen as more good news for the City which rose strongly on Wednesday in anticipation of the cut, but the pound suffered against the dollar and may continue to do so

Forecast For Ten Percent Fall In House Prices

What constitutes a house price crash? If it is a fall of 10% in one year then 2008 could see that crash.

Morgan Stanley’s chief UK economist David Miles has forecast that prices will fall by a tenth of their value next year, which would be the biggest fall ever recorded since records were first taken in 1969. Such a drop could leave many thousands of homeowners in negative equity, bringing back the dreadful days of recession of the early 1990s.

The pain might not end next year, continued Mr Miles - a some time advisor on mortgages to Gordon Brown - also warning that the fall could continue into 2009. The Prime Minister would find this another major blow to his premiership, having spent ten years as Chancellor with economic stability and prosperity.

Five bank rate rises, the US sub-prime crisis, Northern Rock and the credit crunch have brought about a decline in consumer confidence and people are backing away from housing transactions. Mervyn King, Governor of the Bank of England, has also warned that there may be a shortage of mortgage cash in 2008.

On the other side of the Atlantic the United States have already seen a sharp downturn in property values, with a recession a distinct possibility. In the UK  in November house prices fell at their greatest rate for 12 years, according to Nationwide figures, and mortgage approvals were at their lowest level for two and a half years.

Mr Miles said his forecast was a best guess, and added: “I don’t think house prices falling is in any sense a bad thing. There’s a natural tendency for people to view it as bad for the economy, as unhealthy. But I don’t think that’s right. We have a problem of affordability of housing with people struggling to get into the market. It sounds like a big number, but if house prices fell 10% in real terms that would take them back to where they were at the end of last year, or even the beginning of this year. It was impossible for house prices to continue to rise at the average rates we have seen.”

House Prices Down Again

The Halifax has reported a fall in house price for the third month in a row, the first time this has happened since early 1995. The 1.1% drop in November was the biggest monthly fall since last December, and if current trends carry on, the next year will see a plunge in house prices of over 12%.

Economist at Halifax Martin Ellis still feels that the British economy is in good shape, but did say: “The increase in interest rates between July 2006 and July 2007 has taken effect. Higher mortgage repayments and falling real earnings have put pressure on households’ income, resulting in a slowdown in both house price growth and activity.”

The Bank of England is coming under increasing pressure to reduce the base rate from its current level on 5.75%, with the Monetary Policy Committee meeting this week to decide the level for December. Most experts have suggested that the Bank will leave rates unchanged for now, and will probably not reduce them until February next year.

Consumers look as though they are in the mood for some better news as a survey by Nationwide revealed consumer confidence falling at its fastest rate for over three years.

At the same time Clive Briault of Financial Services Authority has told the Council of Mortgage Lenders’ conference that the situation in mortgage markets is likely to get even worse in 2008, with 1.4m people coming of cheap fixed rates and unable to replace them with similar deals – if at all.

It is the fear of rising inflation that will probably mean the MPC will keep the base rate at 5.75%. Oil and food prices have continued to riser and the 2.1% October inflation figure is likely to be higher for November.

High street retailers are fearing a bleak Christmas in the shops as consumers tighten their belts, with mortgage fears and the rising cost of loans and credit.

So far, no one is forecasting a recession, but the possibility of the first one for 15 years is definitely increasing

Top Banking Names Secure Funding

Two top mortgage lenders have managed to secure long-term funding to help through the next 12 months or so, hopefully seeing them through the worst of the credit crunch.

Alliance & Leicester and Bradford & Bingley have secured the funding, but have had to mark down the value of their mortgage-related securities. Alliance & Leicester took a £55m hit on its profits because of debt investment writedowns and a £101m accounting charge, but investors must believe the worst is over as shares moved up by over 7%. Although Bradford & Bingley wrote down CDO and SIV debt by £82m, profits have not yet been hit, but shares remained virtually unchanged.

All UK banking shares have taken a battering recently as concerns for the US mortgage crisis continued to escalate, with fears for the impact on UK banks.

Both A&L and B&B have the backing of money in customers’ savings accounts to help cover mortgage loans (Northern Rock had a lot less of this coverage), but still need money from the markets to assist their funding. A&L has several times denied rumours that it would have to go to the Bank of England for emergency funds. Instead A&L has borrowed over £10bn from big investment banks, and used its mortgage book as collateral, to enable it to continue to write mortgage business. Credit Suisse was responsible for one £4bn loan.

A long planned move by B&B saw it sell off £4.2bn worth of mortgages, with the cash being very helpful in current circumstances. Despite the market turmoil, B&B is looking forward to a good future, saying: “We remain confident about demand for buy-to-let mortgages. The strong fundamentals that have underpinned growth in this market remain.”

Customers will get a better feeling as two of the biggest names in high street lending have strengthened their finances so that they should be able to weather the storm. The cash injection will also come as welcome news to investors

Arrangement Fees Go Through The Roof

Financial information website Moneyfacts says that mortgage arrangement fees have nearly doubled in the past two years. These up-front fees have gone up from an average of £441 in November 2005 to £827 now.

As banks become ever-more desperate for cash they have increased these fees partly to recover income which they have been forced to forfeit through reduced charges in the last two years and high mortgage exit fees earlier this year.

Northern Rock has the highest current arrangement fee at 3.5% - as if consumers didn’t have enough reasons to avoid the ailing bank.

Deals are becoming more complicated with rising fees as these are not always the worst deals.

David Knight of Moneyfacts said: “The increase in fees may not automatically mean that the cost of the deals has increased. What it does mean is the maze which borrowers need to navigate to get the best deal has become more complicated. Unfortunately too many borrowers still focus their initial attention on getting the best rate, without taking full consideration of the true cost of the deal.”

Some months ago Halifax was taken to task by two Liberal Democrat MPs who accused the bank of trying to trick customers into a deal with a low initial rate, but a high arrangement fee. The Halifax mortgage had an interest rate of just 1.99%, but an arrangement fee of £1,999.

However, Moneyfacts say that 24% of mortgages on offer – currently around 6,000 – have no arrangement fee at all.

The latest trend is for lenders to charge an arrangement fee percentage rather than a flat fee. If you took out a £250,000 mortgage with Northern Rock at 3.5% your arrangement fee would be a staggering £8,750. A mortgage of £286,000 would take your mortgage arrangement fee into five figures. An average detached house now costs £343,000.

Market research organisation Mintel commented that the high arrangement fees will hit hard home owners who see their current mortgage deals expire in the next year or two.

Rental Demand Goes Up

The number of tenants looking to rent property privately has reached its highest level for five years in the UK, according to figures from the Association of Residential Letting Agents (Arla).

There is a combination of a number of different factors that is pushing up demand. The factors include the fact that more people are living alone, there has been an increase in immigration and the housing market is weakening. In particular, the South East has seen a shortage of rentable properties, with central London seeing a surge in demand.

The hard facts of the housing market have put more people into the rental market. Unable to keep up with increasing mortgage repayments many have had to sell up and leave, while others have fallen into the arms of the repossesses. From there they have little choice but to try and find somewhere suitable to rent.

Arla said that across the UK lettings agents were warning of shortages. Head of operations at Arla, Ian Potter, said that the peak demand should not come as a surprise as a softening in the sales market is always a precursor to a drive for further demand in the rental market.

According to Arla’s quarterly report, 57% of lettings agents in the South-East of England said that they were experiencing more demand than supply. In other parts of the UK, 37% had reported rental shortages. Meanwhile, Central London has seen demand for rental property increase by a multiple of 13 over the last five years.

Other figures show that tenants are now renting for well over a year, according to the Arla survey, drawn from respondents from 517 letting offices. An earlier average had property staying empty for an average of five weeks, but now the length of time is down to well under a month.

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