Mortgage rates set to fall again

Home loans: Competition hots up and further cuts in borrowing costs expected
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The Independent Online

The cost of home loans is set to fall over the next few months because of mounting competition among lenders and a likely fall in base rates, economists and housing analysts predicted yesterday.

Experts believe the fall may be of about 0.25 per cent, chopping about pounds 10 off the monthly cost of a pounds 50,000 mortgage. Both variable rates and longer-term fixed-interest mortgages will be affected.

But any cut is not expected to match the drop in base rates, given the decision by lenders six weeks ago to cut variable rates to 7.99 per cent without a corresponding base rate reduction.

Ian Shepherdson, an economist at HSBC Greenwell, said: "There are two central processes at work. The first is the weakness in the housing market. Although it is starting to improve gradually, this is in part because of the decision to cut mortgage rates since September. What this implies is that mortgage lenders are becoming like widget manufacturers: if sales are down you compete on price, among other things."

Fixed rates were also facing downward pressure because of a reduction in gilt yields.

"The other factor will be the effect of the Chancellor's Budget measures. If Kenneth Clarke can achieve tax cuts through tight controls on spending, this will have a consequent effect on gilt yields, push base rates down and help cut mortgage rates."

David Kern, chief economist at National Westminster Group, added: "A week ago, I would have said mortgage rates are likely to remain broadly flat. However, in the past day or so we have seen satisfactory inflation figures, leading to the possibility that the Budget is going to be well- received. I expect this will bring forward a reduction in interest rates.

"There also has to be a need for the Governor of the Bank of England to accept this scenario. But the picture does point in that direction: inflation is low, retail figures have been flat, unemployment is showing a slight rise ...

"The secondary issue is the differential between mortgages and base rates. Until there is a definite upturn in the housing market, the pressure is for a narrowing of the gap between the two."

David Gilchrist, general manager at Halifax Building Society, said: "The prospects look quite good for a reduction. What we are seeing at the moment is that there has been progressive segmentation as lenders try to find themselves a niche, with a range of discounts for different classes of customer.

"We would prefer tax cuts to interest rate cuts as far as reviving the market is concerned. If there is any link, that of greater disposable income is the one most likely to move the market."

Earlier this week, Royal Bank of Scotland raised hopes of a fresh mortgage war by dropping its fixed rate to 5.75 per cent until February.

But experts pointed out that RBS was still more expensive than many building societies, and several centralised lenders.