The Bank of England has maintained the base rate at 0.5%, as expected. The base rate is, in truth, so low that it is difficult to believe it could be cut further. But the signals from the Bank are also cautiously good news for the property market, which may be near its lowest point.
Is quantitative easing working?
There is now cautious optimism that the Bank of England's policy of quantitative easing may be having a bigger impact than the most recent base rate cuts. Under 'QE', the bank has been buying assets - so far £26bn worth have been bought, with a total of £75bn to be bought - but without using any funds to do so.
Instead the Bank has electronically generated the money to purchase gilts (government bonds) and top rated corporate bonds. Despite skepticism from some commentators, it seems that this may be having the desired effect of putting more money into the capital markets and enabling banks to start lending again - including through mortgages.
Positive response
It seems that banks are responding positively to QE, suggesting that it is working. According to Prime Minister Gordon Brown, some £50bn of extra lending is expected to be pushed into the system now. Brown expects mortgage lenders to be more willing to lend.
"While lending was very difficult a few months ago and is difficult still, there is more money now available," he said in an interview with the BBC. "There is about £50bn more for lending this year."
New mortgage products
Backing up the Prime Minister's words, some mortgage lenders have begun putting new products on the market, which should improve the availability of home loans. HSBC has been increasingly competitive in the mortgage markets in recent months and is at present near the top of Moneyfacts' best buy charts. Its standard variable rate on its own branded mortgage is 2.95%, and its First Direct brand is offering an SVR of 2.89%.
Now HSBC is launching a new range of mortgages for borrowers with strong credit ratings. The initiative partly implements HSBC's previous announcement that it is increasing its mortgage lending in 2009 by £7.5bn above the level it loaned in 2007.
Loans to value will be at a maximum of 90% and the mortgages will be available to existing HSBC customers of their HSBC Plus and Premier accounts. Non-holders of these accounts can make themselves eligible to apply for the new mortgages by opening a Plus account. Two year fixed rate mortgages will be available from 4.99% and two year discounted rates at 2.49%.
More competitive market
Other lenders look likely to also focus on providing more competitive products, in what will be the first real attempt to increase market share for more than a year. Abbey recently cut its arrangement fee by £500 for two year tracker mortgages. It also launched a four year fixed mortgage at 4.14%, exclusive to first time buyers.
The Yorkshire Building Society is another lender launching new, more competitive, mortgage products. It is now offering two, three and five-year fixed rate mortgages starting at 3.59%. These are linked to low loans to value: its most competitive rates are for mortgages at 60% LTV.
Nationwide recently unveiled new fixed rate products, attached to lower fees, but at slightly higher interest rates.
Take the interest rates now
Ray Boulger of John Charcol mortgage broker believes that fixed rates are now very attractive. He argues that market prices infer that there is an expectation that though quantitative easing is working now, it will eventually lead to higher rates of inflation. This, in turn, means that mortgage rates will rise in the medium to longer term. So, he suggests, borrowers should lock into low interest rates for as long as possible.
"The safest course of action is to buy a five to ten year fixed rate," says Boulger, "although the state of the economy is so bad that there is probably a window of several months in which to do this."
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According to Prime Minister Gordon Brown, some £50bn of extra lending is expected to be pushed into the system now. Brown expects mortgage lenders to be more willing to lend.
