Interest rates cut as housing market flounders
The Bank of England has voted to cut interest rates in March amid further evidence of falling house prices.
Despite hints from key members of the Monetary Policy Committee (MPC) that inflation is set to rise sharply, it voted for interest rates to fall to 5% and ease the pressure on home owners struggling to meet increase repayment costs. The news will also aid first-time buyers priced off the property ladder by rising mortgage rates.
However, the Council of Mortgage Lenders has warned that the interest rate is not the only factor that determines the cost of mortgages. It says this latest cut will not automatically mean cheaper mortgage rates across the market.
The latest figures from the UK's largest mortgage lender Halifax show that house prices fell in February. It also warned that property values will remain flat in 2008, a loss in real terms for many home owners.
Impact on tracker mortgage borrowers:
|Loan size||Repayment mortgage||Interest-only mortgage|
|Before - 6.05%||After - 5.8%||Saving||Before - 6.05%||After - 5.80%||Saving|
Source: CML based on the average mortgage rate as of December 2007
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.