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

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The Independent Online
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