Half a percent base rate cut to benefit tracker home loan customers

Article source: Lin Freestone - www.homemove.co.uk

Half a percent base rate cut to benefit tracker home loan customers

The swift action taken by the Bank of England to cut its Base Rate clearly shows how bad the economic situation is; the Bank, by taking this move had clearly sent the message that immediate action to restore the financial system is needed. The 0.5 percent cut comes at a time when many mortgage borrowers need it the most. The ever increasing rates of borrowing and falling house prices mean that this move by the bank will be more than welcome.

The sudden reduction of the bank’s base rate will directly benefit millions of mortgage customers who currently have tracker products which are linked to the bank base rate. A half a percent interest rate reduction is estimated to help a mortgage customer save approximately £800 in per year, for an average priced home in the United Kingdom. It is encouraging to see that some banks have followed suit to reduce by their Standard Variable Rates by the same amount; these include the Halifax (part of the Halifax Bank of Scotland group), Barclays Bank, Lloyds Bank TSB and the Royal Bank of Scotland (RBS).

At the same time, it is still a wait and see situation as to whether the reduction will trickle down to the mortgage borrowers who are looking for new fixed rate deals bearing in mind that the Libor rate, with which mortgage lenders use to price their mortgages products, is still high. The unusually high libor rate along with recent activities in the housing market has created unwillingness on the part of the banks to lend to each other. As yet none of the building societies have announced any reductions in their Standard Variable Rates or tracker mortgage products. On taking over Bradford and Bingley, the Abbey had announced an increase in its home tracker loan rates by 0.5% meaning that the interest rates are now not any different from when the Bank base Rate was at 5%. This move has also got other mortgage lenders doing the same so that they steer clear of the illusion that they are offering the best deals which would lead to them experiences surges in mortgage applications.

According to Neil Young, Chief Executive Officer of Young Group, a company that offers Property Portfolio services to private investors, the Monetary Policy Committee has traditionally only made changes of a quarter of a percent to the base rate. He said that the half a percent reduction announced along side the proposed £50 billion dedicated towards the rescue of banking institutions is in an effort to jolt the economy.

Neil Young is confident that the 0.5% base rate cut by the Bank of England is a move that will not alter the Government’s inflation target since the market has seen remarkable changes from the time that the 5% Base Rate was set. The present state of the economy is sure to keep inflation in check.

It is however important that the mortgage lenders act towards passing on the rate reduction to their customers so that the overall benefits of the rate cut are shared across the board. It is still important to bear in mind the fact that mortgage lenders are still going to be increasingly selective about which customers they are prepared to lend to, whether there is a reduction of the Bank Base Rate or not. Home owners with substantial equity in their property, as well as those with a large deposit are more likely to be able to secure a mortgage in the current situation.