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Rate Change Overview
October and November saw a combined reduction of 2% in the Bank of England (BoE) official base rate, with December seeing a further 1% cut.
This now takes the Bank of England's (BoE) official rate down to just 2% - the lowest rate seen since November 1951.
This has seen the BoE rate reduce by 3.75% in the last year from 5.75% in November 2007.
The interest rate we see today compared to interest rates in recent decades for the main seems outlandishly low, but this is not necessarily the case.
A bit of history…from 1694 to date…
The rate we know as the Bank of England Official Rate today was originally known as the ‘Bank Rate’ in 1694 and became the ‘Minimum Lending Rate’ from 1974. It was renamed to ‘Minimum Band 1 Dealing Rate’ from 1981, the ‘Repo Rate’ from 1997, becoming the ‘Official Bank Rate’ in 2006. Whilst there are slim differences in these descriptions, they are essentially comparable benchmarks.
There were 11 instances throughout the 1800’s and the period from the 30th of June 1932 to 24th of August 1939 and from 26th of October 1939 to 8th of November 1951 where the interest rates dropped as low as 2%.
Rates hovering between 2% and 4% were common place throughout the 1800’s and in the early 1900’s with the exception of an increase to 10% on the 1st of August 1914 for 5 days before returning to the more ‘normal’ 6% level by the 6th of August that year.
From the Summer of 1973 through to the Spring of 1977, interest rates were mainly in double figures, peaking at 15% on the 7th of October 1976.
There was little respite in the late 70’s as rates were back in double figures by the Summer of 1978, peaking in 1980 at 16%.
Other than a couple of instances of a few months in the mid-80’s rates remained in double figures right through to 1992, the peak being 14.785% from the 6th of October 1989 to the 8th of October 1990.
Source: Bank England Historical Databank - http://www.bankofengland.co.uk/mfsd/iadb/Repo.asp#top

Our Thoughts
We have now seen the committed efforts from the BoE and its Monetary Policy Committee (MPC) which we should really have seen in April and May this year.
Whilst this latest cut continues the MPC’s drive to ease the burden of mortgage and borrowing costs, it does little to increase the flow of money into the markets.
We would still expect to see the BoE act further in rate reductions to levels as low as 1% early next year, the lowest the BoE rate will ever have been in its history.
This cut is of no consequence to the mortgage market in general as lenders are not passing on this cut in their SVR’s and even worse, mortgage products are not adequately reflecting the October or November rate cuts.
Unless there is significant and unrelenting pressure on lenders to price in line with the funding market and BoE rate, the housing market as a whole will be doomed to another year of demise.
It is a sign of the lenders reluctance to lend at present that mortgage products are not adequately reflecting the BoE rate cuts, especially on borrowings exceeding 80% of property values. In essence, this latest reduction from the BoE is unlikely to have much impact on lenders attitude to mortgage lending. More is discussed on this in ‘Lender Reactions – Mortgage Products’ below.
Whilst Gordon brown has been busy negotiating a ‘stay of execution’ for borrowers facing repossession, with an acknowledgement from 8 key lenders to hold off on pursuing possession of properties for a 6 month period. Unless the lending markets return to ‘normal’, this policy will be just that, a stay of execution.
Whilst borrowers are revelling in the rate cuts seen over the past year, savers and investors are somewhat concerned.
The returns on investments and savings have nose-dived this year, as these returns generally fall when rates fall. Where savers and investors have used these returns to provide income, their income has nose-dived as a consequence.
There are many clients who are ‘asset rich, income poor’, a vast majority of which are retired and have little or no ‘earning’ capacity to supplement their income. As they are reliant on investment returns to provide their income – rate cuts cause more issues than they remove. This potentially causes investment capital to be used to supplement the shortfall, further exacerbating the problem of income generation. And so the circle goes on…
It has been suggested to us by our colleagues, David Walsh and Simon Elton, that clients in this position should consider their options carefully and explore the solutions in detail.

Bank of England Links
The next meeting of the MPC will be on the 8th of January 2009. A lengthy Press Release from the Bank of England about this reduction can be found at:
http://www.bankofengland.co.uk/publications/news/2008/121.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

Tax Cuts...?
On Monday the 24th of November we heard from the Chancellor the details of a number of measures to assist the British Public’s purse strings over the next year, the main gift being a temporary reduction in VAT from 17.5% down to 15% from the 1st of December 2008.
A document was released detailing the measures in full.
“He giveth and he taketh away”. The document released by the Government had one glitch. A glitch that suggested that this temporary measure may be counter-balanced in future years with a rise in VAT to 18.5% to recoup the lost revenue. This has been denied by the Chancellor as this proposal was considered but later rejected and had been left in the document ‘by mistake’.
Instead we saw the duty on fuel, cigarettes and alcohol increase, wiping out the benefit on these commodities – just at the time when we are due to travel to see family and friends to enjoy and drink, and perhaps an cigar?
Whilst the announcement to increase National Insurance Contributions (NIC’s) across the board will impact on almost every individual and business, it is the higher earners that are the Chancellors target ‘audience’ with increases in Income Tax rates and reductions in Personal Allowances – but only after the next General Election.
“He giveth and we taketh away”. There are benefits to these proposals for the higher earners, an Income Tax rate of 45% can soon become a rebate of 45% as clients in these income brackets contribute large sums of their income into pension funds.
Our specialist pensions advisers, David Walsh and Simon Elton, are already working on solutions to make the most of these possibilities.
One other measure, not widely publicised in the document, is the potential for small business to pay their Corporation Tax bill over a period of time, reducing its impact on the business and assisting cash flow in the short term. Our own Accountants at Bennett Brooks have confirmed this is correct, although there will be interest charged by Her Majesty’s Revenue & Customs for this ‘facility’.
Whilst it seems an all to distant past, we should remember that the level at which properties are exempt from Stamp Duty was temporarily raised from £125,000 up to £175,000, alleviating this burden for buyers who are purchasing properties below this new level. When considering the average price at which first time buyers are coming into the market, this is a significant saving but only actually makes a difference in 4 of the UK’s Regions.

Lender Reactions - SVR
Governmental pressure on lenders has been unrelenting in the last month to honour the November rate cut in full, and many bowed to that pressure.
It does, however seem that many lenders have ‘got away with’ not honouring the full reduction from October, or indeed from earlier in the year. We will have to monitor how much of the December cut, if any, will be passed on to borrowers whose mortgages are on or linked to their lenders SVR.
It is a symptom of the current climate that many borrowers are finding that remortgage options are not mathematically viable and will therefore be reverting to their lenders SVR at the end of the existing mortgage products. Most are, at this time, taking a ‘wait and see’ stance with a view to choosing a suitable mortgage product at a time when they are more reasonable priced.
As such, it is even more important that the lenders do honour the full rate cuts provided by the BoE. In practice though, and as reported earlier in the week by Michael Coogan, Director General of the Council of Mortgage Lenders (CML), lenders are reluctant to pass on any further reductions from the BoE in their SVR’s. The full announcement from the CML can be found at: http://www.cml.org.uk/cml/media/press/2029

Lender Reactions - Mortgage Products
From the announcement in November which saw lenders caught completely off guard, the latest cut is more in keeping with expectations and as such the product restructuring shouldn’t be as drastic or as frantic as had been seen in November.
From the manic changes brought in throughout November, December appears to have been more structured, considered and expected by the lenders.
In an attempt over recent months to reduce the risk associated with their mortgage borrowings, lenders have shied away from lending at high loan to values (LTV’s), the best products in the market place being available on borrowings below 60% Ltv. Borrowings above 80% Ltv now carry a significant rate penalty.
Lending options are still available at 90% of a property’s value, but typically rates are high at close to 7% and carry significant tie ins, many for as long as 5 years. Add in product fees of around £1,000, and these are at a significant premium even to the lenders SVR.
Mortgage lending at anything above 90% is all but non-existent. Only Bank of Ireland and Bristol & West have potential options, even then limited to 95%, but these do have quite specific requirements which very few clients will be able to meet.
Taking account of the Government and Media pressure placed on lenders to reduce their SVR, most have now taken the stance that they will not allow clients to apply for a new mortgage on their SVR. Client who want to move house and borrow at the higher LTV levels are instead being forced to choose a product which is at a much higher rate, cost and tie in than the SVR.
It is disappointing to see that lenders are structuring mortgage products to attract only the lowest borrowings against property value. As such, BoE base rate cuts, do little to help the housing market move forward, it only helps existing borrowers whose mortgage is linked directly to the BoE base rate or the lenders own SVR (as long as that lender passes on the benefit).
Reading further into the report from the CML on Tuesday, this details lenders taking a firm approach on Mortgage Rationing. In effect, there is some fierce competition to attract borrowers at the lower LTV’s whilst snubbing those wanting to borrow at higher levels.
This Mortgage Rationing impacts mainly on First Time Buyers who, despite being an integral part of the Housing Market, are simply frozen out due to the lack (or high cost) of available mortgages, unless they have a sizeable deposit to put down.
The CML reports that whilst mortgage demand has outstripped supply throughout 2008, this balance could be restored as we move through 2009.

Getting the Market Moving Again
Until lenders reduce the rates, fees and tie in periods associated with borrowings at these higher LTV’s, the housing market will not move forward into recovery
Confidence does appear to be returning – slowly.
From early in 2008, we saw lenders who were heavily reliant on wholesale money markets withdraw from mortgage lending altogether. Banks, whose exposure to such funds, also tightened their purse strings and reduced or ceased mortgage lending altogether, ultimately reducing the supply of money to lend followed this.
As demand continued to far outweigh supply, the cost of borrowing rose 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.
Further ‘support’ seems to be available to lenders in Government led initiatives providing an outlet for lenders to securitise their mortgages in a bid to free up liquid funds to the mortgage market.
In reality, we need to see the pressure from the media and government offices to proactively reduce the Mortgage Product rates (not necessarily the SVR), especially at the riskier, higher LTV’s and ultimately assist the First Time Buyer back into the market.
Help to raise the levels of deposit for First Time Buyers from the ‘Bank of Mum and Dad’ isn’t necessarily an option either. Mum and Dad’s investments have been decimated with the turbulence in the equities markets driving down not only investment returns, but also the capital value of the investment.
We would expect to see some improvement in the housing market in the New Year with Easter being a ‘turning point’ in the market. This could be assisted by the CML’s prediction that the issues of supply and demand for mortgages may subside a little in 2009 as lenders once again begin to lend more freely and begin to ‘trust’ each other again.
From the point discussed earlier, Gordon Brown has been active with lenders in devising plans to ease the burden of mortgage payments on borrowers who are facing the prospect of losing their homes. In particular, he has focussed on those who have lost their jobs through redundancy, for example.
We should not forget that it is possible, and is advised, that when borrowing money, clients protect their commitment to a mortgage debt against issues such as Redundancy. We should therefore remember those borrowers who undertook their responsibilities in this manner and as such they should also receive assistance – perhaps be provided with Tax Relief on premiums paid to such policies.
Reading about tens of thousands of job cuts across all manner of industries and professions does bring home that things can go wrong – jobs are lost, incomes not get paid when you’re off sick or injured – even worse a mortgage debt still remains if you die or suffer serious illness.
Chris Hulme and Zoë Clayton are specialists in developing solutions and product structures to protect against these events. We would urge anyone with shortfalls in their current planning to take action, as the adage ‘it wont happen to me’ simply does not apply – it does happen.

Valuation of Property
The over-riding issue that faces borrowers across the board is the values at which their current or new property is valued.
Whilst we can only work with the best ‘guestimates’ from House Price indices and discussions with Estate Agents, it is ultimately up to a Chartered Surveyor appointed by the mortgage lender concerned that to decide on and report the valuation figure.
In many cases, we are finding that the values provided by surveyors are at the lower end of any comparable evidence they obtain, further compounding the issue of ‘loan to value’ when considering the mortgage borrowings.
One key issue that is presenting itself is the lack of comparable evidence which is usually there to support the valuer's 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 valuer's 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.

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 is a trusted source of such information and economic overview, their latest release can be found at:
http://nationwide.co.uk/hpi/historical/Nov_2008.pdf

Nationwide as an institution is widely regarded as a balanced and considered lender and its views and that of its Economists are similarly thoughtful.
Nationwide Buildings Society obtains its data from its own in-house information centres and we would add that in reports examined in 2008, the house price index of Nationwide, isn’t necessarily a true reflection across all property transactions.
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. At the time of writing, Acadametrics have not yet released their November report, but when it is published (which we believe will be some time next week) it can be accessed via the following link:
**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. Taking a look at the November to November figures reveals they are down by 7.1% nationally, 9.3% in the Northwest.
This could be a further 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.
Rightmove’s headline on their November report; ‘Winter of opportunity for cash-rich bargain hunters’ is expanded with the line ‘Cheapest base rates since 1955 coincide with onset of winter market, giving opportunity for ‘cash-rich and mortgage ready’ buyers to bargain hard’.
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/

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.

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.

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

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

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

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

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