As The Clayton Hulme Partnership specialises as an introducer to lending solutions, a key question in our clients' minds relates to the Bank of England’s Monetary Policy Committee and the decisions they make which ultimately influence the cost of their borrowings.
Following the recent bulletins emailed out to our clients keeping them abreast of pertinent news this page is dedicated to this monthly announcement.
Each month following the MPC meeting, we will publish the link to the latest reports.
The next report from the MPC is due on the 4th of December 2008
6th of November 2008
A late report to you this month but I'm sure you all seen in the press that as far as events have gone this year- this is a big one!!
As such it has taken some time to compile and structure for your reading pleasure.
Rate Change Overview
From October's unexpected turn of events with a unilateral decision by 7 Central Banks to cut rates by 0.5% we now see the beginnings of the way out of the turmoil.
A cut of 1.5% takes the Bank of England's (BoE) official rate down to just 3%. This is the largest rate movement we have seen for some decades bringing rates to their lowest level since 1954.
Our Thoughts
The BoE and its Monetary Policy Committee (MPC) have been accused throughout the past 12 months of lacklustre response to the deepening crisis with the nominal 25 basis point cuts, one in December last year and again in February and April this year. The 0.5% October cut showing the first real signs of a committed effort from the BoE to turn the economy around. A 1.5% cut this month shows an even more determined and constructive effort to stave off a full blown recession, reduce the cost of borrowing and get the flow of money underway again.
In recent months mid way through the year, inflationary pressures were the key driving issue causing concern for the BoE although following the latest reports of looming recession from leading economists this threat appears to have subsided a little leaving the route open to reduce the cost of borrowing across the board.
We would still expect to see the BoE act further in rate reductions possibly bringing it down as low as 2% during 2009 in two or three smaller cuts in the first half of the year. As these are unprecedented times, I would suggest any action would be reactive rather than proactive and we will have to wait and see how the housing market and the economy at large moves through the Christmas period into the New Year.
There have been documentaries in recent weeks where economists and some fund managers have called for rates to be closer to zero, although I wouldn't expect such drastic solutions to be a consideration for the MPC.
Tax Cuts...?
In a bid to stave off a winter of discontent for the low and middle income families, the Government on both sides of the House have muted various schemes to reduce the impact of taxation on the spending on essential items and I believe a reduction in the rate of VAT is one proposal that Mr Brown is quite proud of. This could see the basic rate of VAT reduced from 17.5% down to 12.5% although the reduced rate of 5% charged on Domestic Fuel and Power among other things is unlikely to change.
There could be issues on this as there is an EU Directive which prevents member states from reducing the basic rate of VAT below 15% and the reduced rate no lower than 5%.
Given that these are unprecedented times we could see this come to fruition although the UK does have one of the lowest VAT rates in the EU with most member states hovering just above or just below the 20% mark.
Bank of England Links
The next meeting of the MPC will be on the 4th of December. A lengthy Press Release from the Bank of England about this reduction can be found at:
http://www.bankofengland.co.uk/publications/news/2008/076.htm
Historical information on the BoE base rate is available from their statistical department at:
http://www.bankofengland.co.uk/mfsd/iadb/Repo.asp#top
Lender Reactions - SVR
On a positive note, we would expect lenders own Standard Variable Rates (SVR) will drop but until some very strong pressure is placed upon them by the Government, many will probably continue to hold out. The main 'high street' lenders have made conscious (and very public) efforts to offer the full 1.5% reduction in their SVR but we shouldn't lose sight that most lenders have still not passed on some or all of the previous rate cuts.
Northern Rock, for example, despite the 0.75% reduction in rates between December last year and April this year had only reduced their Variable rate by 0.3%, therefore not passing on the full reduction to their borrowers. As a publicly owned bank, they have been vocal about passing on the full 1.5% offered by the BoE this month but as yet have not provided all of the 0.5% cut from October. I fear we will not see this issue rise again in the media to a level sufficient to gain action for borrowers.
The public outcry on these issues is apparent with a number of Petitions being put to the Prime Minister to act and reduce the direct cost of borrowing. Some of these cam be found at:
http://petitions.number10.gov.uk/BOEratecuts/
http://petitions.number10.gov.uk/SVR-scandal/
http://petitions.number10.gov.uk/NRockRates/
Lender Reactions - Mortgage Products
From the announcement last Thursday, we saw lenders caught completely off guard who had expected a cut of between 0.5% and 1%. Some lenders such as Woolwich were withdrawing tracker mortgage products the day before the BoE meeting with most other lenders following suit very sharply on Thursday.
By yesterday morning (Tuesday 11/11/08), tracker products were all but non existent but we are seeing some announcements from lenders of some such products returning to the market although the margins that these products are at in relation to the BoE base rate are disappointing to say the least.
Do not be fooled by that mid-to-late four percent product that looks so attractive compared to the pay rates available during the first 10 months of this year - the products that were once only 0.45% or so over the BoE base rate a few months ago now sit at a heady 1.7% to 1.9% over the base rate.
In short, these products are only attractive whilst the BoE base rate remains low and there is a great deal of uncertainty as to how long that could continue.
Should the BoE increase the rate back to a nominal 5.25% during your tie in period to that product, you could see your pay rate climb to 7%.
Factor in the fees being levied by many lenders and it won't just be the up front costs that could leave you cold.
The option to take up a fixed rate mortgage product will very soon start to appeal as the pricing of these products starts to reflect the recent rate reductions from the BoE.
The LIBOR rate (London Interbank Offered rate) and 'swap rates' (at which lenders lend money to each other) take a little longer to display the reduced costs of borrowing due to their very nature but this does allow wild swings in rate (either up or down) to be ridden out more easily. Fixed rates tend to be priced closer to the costs of borrowing on such bases and don't appear to truly provide as much value for money at present as could be had by waiting a little longer before undertaking that remortgage or purchase.
Whilst the reduction in the BoE base rate is great news for many borrowers currently on tracker products, and those clients whose mortgage products are coming to an end and reverting the their lender's SVR, we believe it may be some time for the full effect to filter through to the terms and underwriting on which lenders base their decisions and increased loan amounts versus property values.
The best lending terms are at the lower end of the 'loan to value' scale, in effect the less you owe on your mortgage versus the property value, the lower the risk for the lender and the better product terms you should be able to obtain. The best priced products are available at circa 60% loan to value and they increase gradually between this level and 75%. Lending in excess of 85% brings a heftier burden in rate and cost as few lenders are willing to lend at this level or above in the current climate.
Given the reports of house price demise, where a mortgage was 75% of the property value 2 years ago unless significant inroads have been made to reduce the mortgage balance or improve the property and therefore value, it is now likely to be closer (if not over) 85% of the property value.
We are seeing aspects where clients had previous borrowed less than 60% of their property value but are now finding they are ineligible for even 75% products.
We would expect to see some improvement in the housing market in the New Year with some of the best negotiated purchase prices occurring over the winter period, mainly around and during the Christmas fortnight.
Getting the Market Moving Again
To reiterate some of my comments last month, the Chancellor has, in a bid to give the public confidence in this action and in the banks as a whole, been very vocal that the funds being provided to banks in exchange for 'shares' in the business are not to 'bail out' bankers or provide their bonuses but is to bring funding to the banks balance sheets in order that they are prepared to lend to each other and also to lend to us, the British Public.
The cost of borrowing rose so significantly, especially where the lending is at a high percentage of the property value, due to a lack of lending between banks themselves for fear that the bank they were lending to, failed.
The theory behind the injection of funding into the banks is to get this flow of money moving again, and bring back the confidence that bank should have in each other.
Valuation of Property
There is an over-riding issue which faces borrowers across the board and this is the Valuer's and Surveyors who are required by lenders to give an accurate and true value of the property in question. This in itself isn't the problem but the issues we are seeing day after day are that properties are being valued at LESS than true market value which is further hindering an already stressed marketplace.
According to the RICS Appraisal and Valuation Standards 5th Edition. Chapter 3: Valuation Bases and Applications, Practice Statement 3.2 pertaining to Market Value states that the valuation must be based on ‘The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion’
In October's bulletin, we highlighted our belief that there is some contradiction to this when taking comparable evidence and the various house price indices into account and as such I had written a letter to the Royal Institute of Chartered Surveyors (RICS) early in September entitled 'Housing Market Valuations - purposeful down valuing by RICS members' which challenges the current practices leading to property values being artificially lowered.
I have had a response from RICS a few days after our October bulletin, which denies any knowledge of such activities. They confirm that there are no instructions for any of their members to deviate from their published Valuation Standards. In order to understand more on this issue they have invited us to undertake investigation into some of the cases experienced and I will let you know how I get on with this.
One key issue that is presenting itself is the lack of comparable evidence which is usually there to support the valuers stated estimate on a property's value. In essence they look at the current market to compare other properties being offered for sale and those that have sold which are of similar, age, structure, condition and geographic location as the property they are reporting on. Given the lack of property transactions during 2008, there is little for the valuers to use as evidence with much of it being quite historic. The reported house price reductions puts 'quite historic' at transactions over 3 months old.
Even given this issue, we would expect that more could be done to be realistic in valuation figures rather than outright pessimistic.
I would urge anyone who is considering action on mortgages or property, especially those looking to remortgage in the next 6 months, to act quickly and decisively to put a plan of action in place to get the best out this current market - even if the decision is to wait a little longer before buying or remortgaging.
Financial Services Compensation Scheme
Savers who have been cautious in their approach and have saved in simple deposit accounts with various banks and building societies felt there was no risk attached to the deposit. I'm sure it wont take long for the Financial Services Authority (FSA) to invite clients who lose money in UK banks and building societies to claim compensation for 'not being warned of the risks'.
Savers who considered their deposit as 'safe' with Icesave have started to see that there are hopes (and some promises) that the UK's Financial Services Compensation Scheme (FSCS) will provide sufficient redress for most savers. The UK's FSCS is expected to work in conjunction with Iceland's equivalent, Iceland being the home of Icesave and its parent company, Landsbanki.
The compensation is expected to be addressed with around £16,400 from Iceland's FSCS, the balance being topped up to £50,000 via the UK's FSCS, £50,000 being the figure which the Government increased the level of protection to recently. This previously stood at £35,000. A single application form is being promised to keep the process as streamlined as possible but it could still take some months yet for savers to receive their money.
We should bear in mind though that even though the FSCS has been 'marketed' as a guarantee on savers deposits, it is only a 'protection' and does depend on the funding available to the FSCS.
The role of the FSCS covers not only Savers Deposits, but Mortgages, Life and Pensions, General Insurance and Investments. The current limits published on the FSCS website at http://www.fscs.org.uk/ show the funding currently available on each of these areas:
deposits: £1,840m;
life and pension: £790m;
General insurance: £970m;
Investments: £370m;
Home finance: £130m
The maximum capacity of the FSCS funds across these categories at present is £4.03bn
It should be noted here that the FSCS only provides for individuals and not for companies or other legal entities.
We have heard the revelations that many Local Authorities, Health Trusts, Charities and similar have 'invested' some of their funds in such deposit accounts in UK banks and building societies but also on some operated offshore like Icesave. It is not expected that the FSCS will cover any of these deposits, although even if it did, the £50,000 limit would not go far to recoup the billions of pounds such institutions have deposited.
Offset Mortgages and the FSCS
We have been undertaking some investigation this month into this type of mortgage and how the 'savings' element would be treated under the FSCS scheme.
Offset mortgages provide the facility of mortgage borrowing whilst allowing the interest cost of the borrowing to be 'offset' by balances in savings or current accounts that are linked as part of the mortgage product.
The issue that arises is that the if the savings element exceeds the FSCS limit of £50,000 per individual, the protection afforded by the FSCS scheme will only 'protect' the first £50,000 per person.
For example, joint borrowers with an offset mortgage of £500,000, but has £200,000 in the linked savings account will enjoy a significant amount if relief on the interest costs applied to their mortgage, in effect whilst not earning any interest on their savings, they pay no interest on the same portion of their mortgage and are therefore only charged interest on the difference. In this case on £300,000.
The issue arises if the lender fails and is declared as in 'default' under the rules laid down by the regulators.
In the example above, the borrowers would still owe the full £500,000 of the mortgage, but could only claim a maximum of £50,000 each through the FSCS scheme.
This could, on the basis of joint borrowers, lead to a loss of £100,000 from their savings account. In the case of a single borrower on this example, the loss could reach £150,000.
All is not lost as there are some potential safer havens such as National Savings and Investments (NS&I) and some Irish Banks where the 'guarantees' cover 100% of the deposited funds.
Many clients have been asking us to consider their savings and investment portfolio's to gauge whether there are better solutions to retain and protect capital whilst still considering how to gain the best growth or income. Our pensions and investment specialists, David Walsh and Simon Elton, who are Partners of the St. James's Place Partnership and have access to some great tools and impeccable knowledge to deal with such issues.
House Prices
This would be a good time to mention the latest 'house price reports', which in the main appear to be showing that house prices are stabilising and the monthly falls are getting less and less.
The Nationwide Building Society are a trusted source of such information and economic overview, their latest release can be found at:
http://nationwide.co.uk/hpi/historical/Oct_2008.pdf
Reports on house prices, when considered in out own locality, show house prices have fallen but only by 6.1%** in Cheshire and only 6.4%** in Greater Manchester from October 07 to October 08. The FT House Price Index puts the National fall in house prices at 6.2% and the Northwest at 6.3%. This is still somewhat less than we have seen reported in the majority of the press. When compared to lenders own reports that are based solely on their own experience, the FT Index does seem to provide a more grounded consideration of the market.
**Source: FT House Price Index 07/11/2008. Link: http://www.acadametrics.co.uk/ftHousePrices.php
When we consider the asking price of property, we can see that Rightmove show that the UK average asking price is down by 4.9% October 07 to October 08 but in the Northwest, they are down by 7.3% in the same period. This could be an indication of a righting of the asking price but could also be a natural reflection of the winter period and the lead up to Christmas. Being directly linked to the market at the 'front end' gives Rightmove an advantageous look at what's around the corner.
Rightmove Link: http:/www.rightmove.co.uk/
Protection Planning and Trusts
On other aspects of planning which have been highlighted as concerns for clients, protection policies and the structures of these policies have caused some concern on how to obtain the right levels and types of cover and to ensure any claims monies are paid out efficiently to the right people outside of your estate to eliminate the impact of taxation from Inheritance Tax.
We are proactively contacting all our clients about this very important part of financial planning and I have detailed this further at the foot of this email, however, if you would like to discuss this further, please contact me on 0161 434 6016.
8th of October 2008
A day early for my monthly bulletin as we would normally be writing to you after the scheduled MPC meeting tomorrow (Thursday) with this news.
In an unexpected turn of events, we have seen an unprecedented unilateral response to the deepening crisis by no less than 7 Central Banks to cut rates by 0.5%. This is the first cut we have seen since April 2008. The last time we saw a cut of this amount was back on the 8th of November 2001 from 4.5% to 4.0% after the fallout and shockwave of 9/11 and prior to that 4th of February 1999 from 6.0% down to 5.5%.
In the main we have seen the following cuts:
Bank of England (UK) 5.0% to 4.5%
Federal Reserve (USA) 2.0% to 1.5%
European Central Bank (EU) 4.25% to 3.75%
The next meeting of the MPC will be on the 6th of November. A lengthy Press Release from the Bank of England about this reduction can be found at:
http://www.bankofengland.co.uk/publications/news/2008/067.htm
Despite the MPC's concerns about inflationary pressures in recent months, it now appears that this threat and pressure has subsided due to the downturn in the economy with the UK being in recession in all but name. This has eased the decision for the MPC and other Central Banks and brings this news a day ahead of schedule.
From this announcement today, we would expect lenders to react quite sharply on their product pricing and structures. We would expect to see Tracker and Discount products rise in price and for fixed rate products to fall slightly.
We would expect lenders own Variable rates will drop but possibly not by the full 0.5%. Northern Rock, for example, despite the 0.75% reduction in rates between December last year and April this year have only reduced their Variable rate by 0.3%, therefore not passing on the full reduction to their borrowers. I fear we will see a similar stance from Northern Rock again.
Whilst this is great news for many borrowers currently on tracker products, we believe it may be some time for the full effect to filter through to the terms and underwriting on which lenders base their decisions and increased loan amounts versus property values.
I would urge anyone who is considering action on mortgages or property, especially those looking to remortgage in the next 6 months, to act quickly and decisively to take full advantage of today's actions.
This cut in rates is in addition to the recent announcement from the Chancellor that £50 billion will be made 'available' to provide liquidity to the banks.
The Chancellor has, in a bid to give the public confidence in this action and in the banks as a whole, been very vocal that these funds are not to 'bail out' bankers or provide their bonuses but is to bring funding to the banks balance sheets in order that they are prepared to lend to each other and also to lend to us, the British Public.
Confidence has been severely knocked this week with more bad news across the globe, especially with overseas banks such as Icesave where an estimated 300,000 British savers have around £4 billion saved in what they believed were 'safe' havens for their funds.
Savers who have been cautious in their approach and have saved with Icesave may now get burned but there are hopes (and some promises) that the UK's Financial Services Compensation Scheme (FSCS) will provide sufficient redress for most savers. The UK's FSCS is expected to work in conjunction with Iceland's equivalent, Iceland being the home of Icesave and its parent company, Landsbanki.
The compensation is expected to be addressed with around £16,400 from Iceland's FSCS, the balance being topped up to £50,000 via the UK's FSCS, £50,000 being the figure which the Government increased the level of protection to only yesterday. This previously stood at £35,000. A single application form is being promised to keep the process as streamlined as possible but it could still take at least 3 or 4 months for savers to receive their money.
Many clients have been asking us to consider their savings and investment portfolio's to gauge whether there are better solutions to retain and protect capital whilst still considering how to gain the best growth or income. Our investment specialist, David Walsh, who is a Partner of the St. James's Place Partnership and has access to some great investment tools and impeccable knowledge to deal with such issues.
This would be a good time to mention the latest 'house price reports', which in the main appear to be showing that house prices are stabilising and the monthly falls are getting less and less.
The Nationwide Building Society are a trusted source of such information and economic overview, their latest release can be found at:
http://nationwide.co.uk/hpi/historical/Sep_2008.pdf
Reports on house prices, when considered in out own locality, show house prices have fallen but only by 2.7%** in Cheshire and only 2.8%** in Greater Manchester which is a far cry from the reported National average as seen in the majority of the press.
**Source: FT House Price Index 11/9/2008
Comparison: Rightmove have the Northwest at 3.2% reduction in house prices Year-on-Year to September 2008
There is an over-riding issue which faces borrowers across the board and this is the Valuer's and Surveyors who are required by lenders to give an accurate and true value of the property in question. This in itself isn't the problem but the issues we are seeing day after day are that properties are being valued at LESS than true market value which is further hindering an already stressed marketplace.
According to the RICS Appraisal and Valuation Standards 5th Edition. Chapter 3: Valuation Bases and Applications, Practice Statement 3.2 pertaining to Market Value states that the valuation must be based on ‘The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion’
We believe there is some contradiction to this when taking comparable evidence and the various house price indices into account and as such I have written a letter to the Royal Institute of Chartered Surveyors early in September entitled 'Housing Market Valuations - purposeful down valuing by RICS members' which challenges the current practices leading to property values being so low and I will let you know how I get on with this.
Again, I would reiterate my message above to act quickly and take advice on these issues as incorrect valuations or estimates of value can lead to lending terms being unavailable or available only at more punitive rates and costs.
4th of September 2008
As we had thought in previous bulletins, this mornings meeting of the MPC has brought no surprises in leaving the rate unchanged at 5.0%, although the persistency of increasing inflation still bears heavily on these decisions.
July's MPC meeting saw an even split in the voting by the nine members, seven voting to keep rates at 5%, one voting for a 0.25% cut and one for a 0.25% increase and we see the same voting structure in the August meeting as per my prediction from our last bulletin - 'I would expect to see a similar voting pattern emerge when the minutes of this months meeting are released on August 20th'.
As inflation continues to weigh heavy on the British public' expenditure, the pressures from Unions representing their members still fight on for inflation linked pay structures despite the pleas from Mr Darling and Mr King for restraint.
This weeks reports from the Organisation for Economic Co-operation and Development (OECD) that the UK economy will officially slip into recession in the last 2 quarters of this year, pressures the MPC to reduce rates to stimulate the economy, but again I would reiterate my expectation for the MPC to retain the rate at 5.0% for the balance of this year.
Recently we have seen Oil prices fall to as low as $108 a barrel from its near $150 a barrel high a few months ago which is some relief to those who directly rely heavily on this commodity which ultimately feeds through to the costs of goods in supermarkets and shops and affects us all.
Alistair Darling and the Treasury made an announcement on Tuesday this week that Stamp Duty Land Tax threshold is increased on the lower band taking the threshold up from £125,000 to £175,000 on property purchases for a 12 months period from the 3rd of September. Stamp Duty will therefore not be payable on such transactions at or below £175,000 but will still be payable at 1% of the chargeable consideration above £175,000 up to and including £250,000.
Whilst this will encourage some buyers back into the market place, the higher limits of £250,000 and £500,000 at which Stamp Duty is charged at 3% and 4% respectively should perhaps also have been reviewed and increased accordingly to encourage buyers at these levels to further their house purchase goals.
The new level will assist those buyers (especially First Time Buyers) wanting to purchase properties below this new level, but unless the sellers of those properties have some incentive to make their onward move, potentially into these higher bands, it is unlikely to have much of an impact.
The estimated cost of this increase is £600 million and in conjunction with this announcement, the Communities Secretary has announced a £1 billion fund to assist 6,000 families under threat of repossession and assistance to 10,000 First Time Buyers with loans of up to 30% of their property purchase. Eligibility is understood to be clients with incomes of below £60,000 which I would hazard a guess includes almost all First Time Buyers.
Mortgage products have continued to reduce in price with some lenders relaxing slightly on the loan to values at which they are willing to lend. We do see however that the reductions mainly benefit those borrowing less than 75% of their property's value with those wishing to borrow at the higher levels still paying the price of high mortgage product rates and arrangement fees.
I would expect these product reductions to level off in the next couple of weeks and as such September could well be the time to secure that remortgage product you have been waiting all summer for.
Borrowers who took out 95% or 100% mortgages in recent years will still continue to find difficulty in obtaining lending from the market leaving their options limited at what the existing lender will provide. Many are finding that their existing lender is unwilling to accommodate requests for 'new products' and worse still where there are options to choose a new lender we have seen the Valuation reports for properties come in at below market value.
I have written a letter to the Royal Institute of Chartered Surveyors (RICS), the governing body for surveyors, in order to get a handle on this practice and will let you know in due course what RICS stance is.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/045.htm
7th of August 2008
As we had thought in last months bulletin, the inflationary pressures have put pay to a cut in the rates. We should bear in mind that the economic environment has counterbalanced this and limited any option to increase the rates at this time.
July's MPC meeting saw an even split in the voting by the nine members, seven voting to keep rates at 5%, one voting for a 0.25% cut and one for a 0.25% increase. As such this months decision raises no eyebrows and pretty much meets the expectations seen from many commentators. I would expect to see a similar voting pattern emerge when the minutes of this months meeting are released on August 20th.
This mornings news sees inflation break through the 4% mark, now standing at 4.4%, a significant increase from July. Still driven by the recent high costs of fuel and energy, inflation shows no sign of slowing and recent announcements from other utilities suppliers of costs increasing above inflation over the next 5 years could add to these woes.
The cries of help from Mr Darling and Mr King for us all to be 'reserved' in our quest for higher incomes and inflationary based pay rises to combat increases in our own personal expenditure provides no comfort for the British public and demonstrates a severe loss of control of the economy by the Treasury and the Bank of England.
The trade union strike actions by Unison for inflationary based pay rises for its members in the public sector puts pressure on the public purse and the mantra of resisting such pay awards - it will be interesting to see the results unfold through the balance of 2008.
We could therefore see inflation escalate further and I would not be surprised to see a rate increase in September although I feel the economy could hold out until later in the year before such action would be needed.
Alistair Darlings recent 'leak' about his potential plans for the temporary removal or deferment of Stamp Duty payments to stimulate the housing market has (until he makes a decision) stifled the housing market even further causing many sales to fall through since the weekend.
The root issue here is that whilst there is a glimmer of hope of a saving or deferment of Stamp Duty payment (£9,000 on a £300,000 property purchase) buyers quite rightly want to find out whether they will qualify for this 'support' and are either pulling out from buying or delaying completion of their purchase. My concern here is that Mr Darling is not known for being a 'decisive' Chancellor and we could be waiting for some months before a decision is made - but it could be all too late - the void between economic growth and controlled inflation grows ever deeper.
As discussed previously, whilst we do not expect the Bank of England base rate to fall, the disparity between the pricing of mortgage products and the Bank of England base rate still remains - but we are seeing this reduce with many lenders reducing their product pricing across the board as the money available to them on the Swap markets now starts to fall.
Where we see increases in rate from the Bank of England of up to 25 basis points, I would still expect that lenders could absorb this increase naturally and would price mortgages accordingly - at least for a short period anyway.
A year ago, a good 2 year Tracker product would be tracking at or a small margin below the Bank of England's base rate. Recently we have seen these at a margin in excess of 1% above the base rate although as I write today, lending at below 75% of the property value is dipping towards 5.75%. Interestingly enough, Northern Rock are one of the front runners in this product pricing being one of the most competitive lender on 2 year Tracker and 2 year Fixed rate products.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/044.htm
10th July 2008
Further to this mornings meeting of the MPC, as we had thought in last months bulletin, the inflationary pressures have put pay to a further cut in the the rates.
From reading the 'open letters' which were exchanged between Mervyn King (Governor of the Bank of England) and Alistair Darling (Chancellor) on the 16th and 17th of June, there were hints from Mr King that he would be aiming to put the interest rates up. Mr Darlings response on the 17th appears to be an acknowledgement of the Governors points raised than providing any constructive comment or knowledge about how to deal with the current crisis and carries no objective opinion or solution other than to suggest that he and the Treasury will support the decisions of the MPC.
In his letter, Mr King, makes a few key points relating to the analysis of the inflation figures with levels now reaching 3.3% and that expectations are such that it could hit 4% by the end of 2008 and he indicates that it is the intention of the Monetary Policy Committee to operate its rate policy to control inflation.
Mr King clearly understands that the inflation levels are a global issue a majority of which is due to the recent hikes in fuel, oil and gas prices and in his letter Mr King writes, "These components alone [food, fuel, gas and electricity] account for 1.1 percentage points of the 2.2 percentage points increase in the CPI inflation since December". In particular he highlights the increase in the cost of oil which has risen by 80% in 2008 although he notes that retail fuel prices have risen by 20% this year.
There is a fundamental problem with the plans Mr King has for the MPC meetings and decisions in that rate control is a governance across the board of all commodities and costs, whereas the inflationary issues are limited to a key commodity sector and I do not believe rate controls will result in a positive outcome. Whilst it can drive down our usage of energy to reduce our costs, rate increases will naturally increase the cost of other household requirements, in particular mortgage's and other borrowings.
Our thoughts on this now are such that we will be lucky to see any rate cuts this year whilst the inflationary pressures are suggesting an increase in rates. The balancing pressures of the economy and the housing market in particular I believe will see us entering 2009 with rates remaining at 5%. It will be interesting to see how the MPC voted this morning, in respect of the individual votes cast, when the minutes of the meeting are released on the 23rd of July.
Whilst we do not expect the Bank of England base rate to fall, there is still a great deal of disparity with the mortgage products currently available and the Bank of England base rate.
In relation to the current product pricing of mortgages, there is still a large gap between the Bank of England base rate and the product pricing when compared to recent years and whilst it would be unrealistic to expect product pricing to return to its previous levels I would expect product rates to continue to fall and where we see increases in rate from the Bank of England of up to 25 basis points, I expect that lenders could absorb this increase naturally and would price mortgages accordingly.
A year ago, a good 2 year Tracker product would be tracking at below the Bank of England's base rate but currently we see these at a margin in excess of 1% above the base rate although some lenders are now dropping tracker solutions below this.
As such, even without further reductions from the Bank of England in the coming months, we could see the cost of new mortgages falling, the impact of which should bring back some element of affordability into the house buying public and bring a start to the end of the property market suffering as buyers and sellers confidence starts to return throughout the balance of 2008.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/042.htm
5th June 2008
Further to this mornings meeting of the MPC, as we had thought in last months bulletin, the inflationary pressures have put pay to a further cut in the the rates.
Our thoughts on this now are such that we will be lucky to see a rate cut before August. The continuing global crisis, which is not confined to the financial markets but now includes food and energy costs soaring beyond the affordability of the lowest paid households, is limiting any room the MPC has for manoeuvre in controlling any of its key criteria.
Whilst we do not expect the Bank of England base rate to fall before the end of summer, there is still a great deal of disparity with the mortgage products currently available and the Bank of England base rate.
A year ago, a good 2 year Tracker product would be tracking at below the Bank of England's base rate but currently we see these at a margin in excess of 1% above the base rate. We would therefore expect the lenders to have now shored up their balance sheets with the 'funding' provided by the Bank of England and the Treasury and to be in a position to either 'want' to lend again or even 'need' to lend again at more competitive rates than have been seen in recent months.
As such, even without further reductions from the Bank of England in the coming months, we could see the cost of new mortgages falling, the impact of which should bring back some element of affordability into the house buying public and bring a start to the end of the property market suffering as buyers and sellers confidence starts to return throughout the balance of 2008.
The official press release from the Bank of England is available via the link below.
http://www.bankofengland.co.uk/publications/news/2008/034.htm
8th May 2008
Despite rumours (and expectations) of a 0.25% cut in rates, we have to bear the brunt of 5% for at least another month.
From the rate cut in April, we saw the recent input of £50-billion into the financial markets by the Bank of England on top of £20-billion in the weeks prior to that. We had expected a rate cut to be on the cards for May 2008 with the recent pressures in the financial markets but the interests of protecting the economy against inflation has proved to be the over-riding factor in this months meeting.
We should bear in mind that the key causes of inflation issues at present (on top of the financial woes and fears in the housing market) are the deepening energy crisis and food growth and supply problems. Only a week or so ago, we saw the basic cost of rice increase from $300 per ton to over $1,000 per ton in the space of a day or two. Mortgage interest rates on new products are a key issue with a disparity between new product rates compared to the Bank of England rate.
Would it therefore be unrealistic to expect to see further pressures on the Government and the Bank of England towards and during June to actively review the taxation applied to energy and to reduce the Bank of England rate to 4.75%.
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2008/032.htm
10th April 2008
The pressure in recent weeks on the financial systems in the UK brings a further 0.25% cut in the rates this month reducing the rate to 5.0%. Rising energy prices feeding through to the costs of food and other essential commodoties and the reduction in available credit hasn't been helped by the hoarding of funds by many lenders. It is seen by many that the end consumer has not actually felt the real benefit of the rate cuts so far.
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2008/026.htm
6th March 2008
Following the February cut, it always seemed too much to ask (or expect) a cut this month and as such the rate remains at 5.25%. Reports of the Federal Reserve providing a 1% cut in the U.S. rate could ad pressure to the April meeting of the MPC.
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2008/015.htm
7th February 2008
Given the pressures throughout January and the Federal Reserve's last ditch attempt with an emergency rate cut of 0.75% in the US, the further 0.25% rate cut arrives from the latest MPC meeting.
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2008/004.htm
10th January 2008
From the good news in December, the Bank of England's Monetary Committee who met this morning have voted to keep the rates at 5.5% - not a great surprise but perhaps puts pressure on the February meeting which will be held on the 7th of February - watch this space.
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2008/001.htm
6th December 2007
Good new - an early Christmas present from the Bank of England!!
The official press release from the Bank of England is via the link below.
http://www.bankofengland.co.uk/publications/news/2007/156.htm
In following any the above links you will be departing from the regulatory site of The Clayton Hulme Partnertship Limited. Neither The Clayton Hulme Partnership Ltd nor Home of Choice is responsible for the accuracy of the information contained within the linked site.
Please note that Trusts, Overseas Mortgages and some Buy to Let mortgages are not Regulated by the Financial Services Authority
