Will rate cut help housing market?


The latest fall in house prices – 2.5% in March, the biggest drop since the property crash of the early 1990s – has contributed to the Bank of England’s quarter-point rate cut on Thursday to 5%. While this is a welcome move for businesses and financial markets, it is not expected to have a dramatic impact on the struggling housing market.


[UKPRwire, Tue Apr 22 2008] The latest fall in house prices – 2.5% in March, the biggest drop since the property crash of the early 1990s – has contributed to the Bank of England’s quarter-point rate cut on Thursday to 5%. While this is a welcome move for businesses and financial markets, it is not expected to have a dramatic impact on the struggling housing market.

Some of the benefits of the rate cut will be passed on to borrowers, but not all lenders will be lowering their rates. Nationwide and Alliance & Leicester are the latest to raise their borrowing costs, on the same day as the Bank of England rate cut.

Banks and building societies are pulling mortgage products from the market at an ever accelerating rate, while further tightening lending criteria (this week, Abbey was the last mainstream lender to withdraw the 100% mortgage, as well as increasing the cost of many of its tracker and fixed-term products). Consequently, customers are having a much harder time chasing down an affordable mortgage – a situation which even three rate cuts in the past six months has done nothing to improve. For some borrowers, especially first-time buyers without a deposit, getting a home loan has now become virtually impossible.

Lenders are now requiring borrowers to have a sizeable deposit or equity stake in their home, which places another large category in a vulnerable position. Many of the 1.4 million homeowners coming to the end of their fixed-rate mortgage deals this year may be facing serious difficulties – if they have less than 5% equity in their home, they will have to pay the more expensive variable rate, resulting in much higher mortgage repayments, which in turn may be the catalyst in tipping the household’s finances over the edge.

In response to the seriousness of the situation, government ministers will be meeting mortgage lenders to discuss the scale of negative equity problems and ways in which lenders can assist borrowers facing difficulties (including extending loans so smaller monthly payments can be made). Next week the Bank of England will be giving another £15 billion to the money markets to increase the funds available for mortgage lenders.

“The threat of repossession is suddenly looming large for many owners who never imagined their home would ever be at risk,” said Lawrence Smith of Decision Homebuyers. “As house prices continue to drop, the danger of falling into negative equity is also becoming a frightening prospect. Right now, owners, buyers and sellers alike find themselves at a difficult impasse, and against this backdrop the rate cut today will offer little relief.”





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