The ERM Crisis: Interest Rates: Cost of mortgages in Britain set to fall

THE cost of borrowing for Britain's 10 million mortgaged homeowners could soon fall as the imminent collapse of the exchange rate mechanism paves the way for a reduction in domestic interest rates.

David Gilchrist, general manager of Halifax Building Society, said: 'We would like to see another reduction in interest rates. Inflation will remain at a low level so real rates of interest are still very high. If there is a cut in the base rate we would bring the mortgage rate down.'

Rates on fixed-rate mortgages - which are funded from the wholesale money market - have been falling in recent weeks, heralding a general cut in interest rates.

However, future cuts in the standard cost of home loans could be token gestures aimed at boosting confidence in the housing market rather than cutting monthly payments by a meaningful amount. The basic mortgage rate, at 7.99 per cent, is already at a 25-year low.

Borrowers cannot necessarily expect to see the cost of mortgages fall by the full amount of any base rate cut. Lenders are likely to follow the pattern set over the past year of delaying mortgage reductions for a month or more and by trimming rates by less than the full amount in order to restore profit margins.

Abbey National, the second largest lender after Halifax, said yesterday that it did not expect to pass on the full base-rate cut.

Margaret Schwarz, senior economist at Abbey, said the savings market was too competitive for the bank to be able to afford this.

Nationwide Building Society announced yesterday that it is to cut rates on its savings accounts by an average of 0.3 points from tomorrow. The society said this was an adjustment to bring its rate into line with those of other societies.

Nationwide said margins were under pressure and the only alternative would have been to raise mortgage rates further. However, it did not rule out another cut in mortgage rates or savings rates if the base rate moves again.

Brian Davis, operations director at Nationwide, said: 'If the base rate is cut we will have to think again. If it was cut by more than a half of a percentage point it would be surprising not to reduce the mortgage rate a little.'

A half-point cut in the standard mortgage rate reduces payments on the average 25-year repayment mortgage of pounds 33,000 by about pounds 8 a month.

Lenders believe that another cut in mortgage rates, however small, would help to instil confidence among homeowners and is the key to recovery in the housing market.

Earlier this week, figures released by the Council of Mortgage Lenders showed that lenders are still repossessing homes at the rate of more than 1,200 a month and nearly 350,000 people are behind with their mortgage payments by more than six months.

Lenders have had little success in stemming the tide of repossessions through mortgage rescue schemes. Interest-rate cuts have been more beneficial.

Adrian Coles, director general of the Council of Mortgage Lenders, said: 'Another interest-rate cut would be welcome for the housing market. It has a significant impact on the overall amount of interest paid. It would assist further in reducing the number of possessions and arrears.'

Mr Coles said that the 2.75 percentage point cut in mortgage rates since Britain left the ERM last September had saved homeowners an annual pounds 10bn. Money, page 22

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Senior Solution Architect - Contract

£500 - £600 per day: Recruitment Genius: A Senior Solution Architect is requir...

360 Resourcing Solutions: Export Sales Coordinator

£18k - 20k per year: 360 Resourcing Solutions: ROLE: Export Sales Coordinato...

Recruitment Genius: B2B Telesales Executive - OTE £35,000+

£20000 - £35000 per annum: Recruitment Genius: The largest developer of mobile...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue