Increase in fixed rates as "perceived" inflationary pressures start to build

Mervyn King hinted in his Mansion House speach that there were some signs that quantitative easing was starting to work and that the £125Bn injection may be sufficient - I really hope so !!

The SWAP markets had already reached the same conclusion with 3 year SWAP rates bottoming out in February at 2.3%, having hit 3.11% earlier this month but now back at 2.98%; we doubt that it will suatain a sub 3% position for very long. And sadly lenders have reached the same view and have been gently pricing upward on prodcuts to absorb a likley higher level of underlying pricing.

On the plus side lenders are looking forwards and starting to initiate discussions about criteria improvements and changes to product profile. Rest assured this has not been a topic of discussion since the autumn of 2007. Two niche lenders are looking at new Buy to Let offerings that might cater for limited companies or HMO properties, albeit at a price. The judgement, thereafter, is whether the ability to raise extra capital and perhaps conclude an additional deal is justifiable against a higher cost.

We will get back to you with an e-newsletter in the next week or two but if you want to chat through any scenarios in the meanwhile we can formulate a plan with you that is ready to go when the lenders start to change their stance.

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Base Rate remains unchanged at 0.5% - 09.04.2009

As expected, the Bank of England have kept Base Rate on hold at 0.5% this month, halting the steady trend of reductions over the last few months. With the MPC’s ammunition more or less spent in this area, all eyes are now on the Bank’s Quantitative Easing programme designed to stimulate the much need liquidity into the market.

Mortgage rates would appear to have bottomed out and now is the time to act if you are looking for competitive Residential mortgages or Buy to Let mortgages. Fixed Rates are proving popular with both homeowners and investors with many borrowers now looking to lock into 2, 3, and 5 year rates before the cost of funds starts to rise over the coming months.

With regards to Commercial Mortgages, there are again some good deals to be done whether you are an investor, developer or are looking for premises for your own business. Despite what you read in the press, Banks are lending and with the cost of funds relatively low, there some very attractive commercial rates available for the right deal.

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Lloyds/ HBOS commit additional £3Bn to mortgages this year

Lloyds / HBOS fell on the sword finally and gave up some £260Bn of "assets" into the APS and in return found  UKFI now owning 65% of its shares and a commitment to increase its proposed mortgage lending from £9Bn to £12Bn this year. The split between pure residential mortgages and Buy To Let mortgages has not been defined but a cynic might argue for a bias towards the former group as that is where votes in any upcoming general election would lie.

An additional £9Bn is also promised to business lending but the challenge as with all these things is proving the benefit ie borrowers actually finding it easier to obtain credit.

You can follow developments on our quantitative easing updates and views page.

Will everyone benefit from the 0.5% cut in Base Rate?

Media and politicians focus on residential mortgages when Bank Base Rate (BBR) is cut as that is the point of maximum impact on individuals and ultimately where votes in the next general election will be won or lost.

Much media focus over the last 5 months has focused not only on how much lenders reduced their SVR but also on the date at which it will be implemented. This is monitored very effectively by the BBC on http://news.bbc.co.uk/1/hi/business/7872344.stm and you can see who passes on what amount and how quickly they do, or don't, apply it. You can also see our own graph below.

Many residential mortgages are on fixed rate mortgages of 2, 3 or 5 year duration. These borrowers will generally be paying mortgages between 4.75% and 6.75% and will be looking carefully at the clause that identifies what price they will pay after the initial fixed rate period. The majority will revert to the lender's standard variable rate (SVR) which is at the lender's discretion and currently varies from 3% to 5.79% (ignoring one lender with an eye watering 8.44%). Several have already stated their intent to pass on the latest rate cut in full (Nationwide, LLoyds, HBOS and Woolwich) but this will still mostly be on a margin greater than Base + 2%. Borrowers should also check that their mortgage doesn't include a "collar" that would impose a minimum interest rate - for example 3%. The most fortunate borrowers are those who have a Bank of England Base Rate (BBR) linked mortgage where the 0.5% cut is applied with immediate effect !

For the very small group of borrowers who have a mortgage headline rate with a discount of 1% or more to BBR , there is the delightful prospect of a negative interest rate. In reality this simply won't happen but there doesn't yet seem to be an industry wide solution to this conundrum. Even when this is agreed, I doubt whether most lenders computer systems will cope !!

Buy To Let borrowers mostly benefit from mortgages that are linked to BBR or LIBOR rate and will have enjoyed ever improving cashflow in recent months. We have not identified any "collar" clauses in the Buy to Let mortgage sector. Some borrowers will be on SVR with a lender and if that lender is no longer actively supplying new mortgages they may not be passing on BBR cuts in full to borrowers - 4.84% SVR doesn't seem expensive until you equate it to BBR + 3.84%. Refinancing these mortgages to other lenders can sometimes also release equity for further purchases if gearing is relatively low.

Business borrowers are invariably funded to BBR or LIBOR rate - sometimes lenders will stipulate that loans above £1M, must be funded to LIBOR to mitigate risk. A few banks will offer "dual pricing on each transaction - BBR + 2.75% or LIBOR + 2% ie the differential between the LIBOR and BBR in the money markets. For these borrowers the issue isn't so much price as the availability of credit !!

The Government will maintain its focus on BBR and cite any lender as irresponsible who doesn't match the BBR reductions regardless of the real funding cost either from wholesale funds or from retail deposits. And of course this portrays them as the consumer's champion which will be important as a general election approaches; but now that they (and us as taxpayers) have significant stakes in both RBOS and Lloyds HBOS and full ownership of Northern Rock and Bradford and Bingley, they need to be mindful of their investment in these institutions when they issue headline grabbing statements.

By clicking on the below you can see a consolidated list of lenders and any benefits they have passed on. We will be updating this as things develop.