Is the mortgage market on the road to recovery?

The mortgage market could be on the road to recovery as Abbey becomes the latest lender to reduce interest rates on its mortgages.

Abbey is cutting rates on all its tracker and flexible mortgages by 0.05%, with selected fixed rates also falling by up to 0.17%. Nationwide recently announced that as a result of falling swap and Libor rates – the cost of borrowing from other institutions to fund lending – it has reduced the rates on some of its two and five-year fixed-rate deals by up to 0.3%.

Royal Bank of Scotland also recently reduced rates slightly.

The cuts come in light of the Bank of England's £50 billion Special Liquidity Scheme. Since the scheme was unveiled in April, the cost of interbank borrowing has reduced slightly giving lenders more opportunity to reduce rates on their mortgage deals.

The Special Liquidity Scheme means lenders can temporarily swap mortgage-assets for government bonds for up to three years. Although some experts claim it doesn’t go far enough in helping cash-stricken banks, it does appear, to some extent, to be having the desired effect.

A spokesperson for Abbey says: "We have already decreased rates on flexible rate and tracker mortgages by 0.10% in response to the Bank of England's recent cash injection. This additional 0.05% reduction anticipates future falls in Libor rates and will further support the
Bank of England's action in helping to bring liquidity back to the UK mortgage market."

The cuts have been hailed by some commentators as a sign that the mortgage market is starting to recover.

Ray Boulger, senior technical manager at John Charcol, says: “This could be the beginning of the end. While mortgage rates across the market as a whole are still increasing, changes are not happening as quickly, and we are also seeing some price cuts.

“Since December, lenders have priced upwards to avoid competition, but we are seeing a bit more stability following the Bank of England’s Special Liquidity Scheme.

“There is a long way to go, but it seems we are past the worse.”

Sean Gardner, of, agrees that Nationwide’s rate cuts suggest the mortgage market is starting on the road to recovery.

But he adds: “It still remains the case that the biggest struggle for borrowers is not being able to afford a mortgage - it's being able to get one. Availability remains the problem despite all the government’s efforts to get lenders lending.”

New figures show “subdued” levels of mortgage lending in March, with the number of house purchase loans down nearly 50% from the same month in 2007. Lending to first-time buyers was also down from March 2007 by nearly 50%.

The Council of Mortgage Lenders (CML), which compiled the figures, says mortgage lending will continue to decline in the coming months.

Michael Coogan, director general of the CML, says conditions have improved since the Bank of England announced its Special Liquidity Scheme.

But he warns: “Interbank lending rates still remain high relative to the Bank of England base rate and any improvement in credit market conditions will take time to feed through into the mortgage market.”

Elsewhere, HSBC has extended its offer to match interest rates for people coming off fixed rate mortgages until 29 June.

The deal is available to all UK homeowners whose fixed-rate mortgage period expire before 31 August. However, mortgage brokers warn that conditions apply including application fees of up to a whopping £4,099.