Millions of homeowners will get no respite from rising mortgage costs despite the Bank of England's decision to cut interest rates for the third time since the beginning of the credit crunch, analysts warned yesterday.
While several leading mortgage lenders have already cut their standard variable interest rates in line with the 0.25 percentage point cut announced by the Bank's Monetary Policy Committee, home loan providers continued to increase the cost of fixed-rate products.
Hours before the MPC cut base rates to 5 per cent, the Nationwide and Alliance & Leicester building societies both said they were withdrawing some fixed-rate mortgages and replacing them with more expensive products.
Nationwide and A&L, which have each already raised the cost of such products once in recent weeks, follow a spate of lenders in pulling their most competitive fixed rates from the market.
Some mortgage providers are taking even more radical action. The Bank of Ireland withdrew its entire mortgage range from the market yesterday, in line with a similar move announced by First Direct last week.
Michael Coogan, the head of the Council of Mortgage Lenders, said home loan providers had little choice but to increase the cost of borrowing. "In these dysfunctional market conditions, the base rate is not in itself a good guide to the cost or availability of funds to lenders," he added.
While yesterday's base-rate cut is the third downwards move by the MPC in five months, Libor, the rate at which banks lend to each other, remains stubbornly close to 6 per cent. "The fact remains that the three-month Libor has hardly eased at all and it stands at 5.92 per cent," said David Buik, of Cantor Index. "It is interesting to note that, on 7 February, Libor was 5.58 per cent – since when we have had two cuts in base rates from 5.5 per cent to 5 per cent."
Yesterday's base-rate cut is good news for up to half of Britain's 11.8 million mortgage borrowers. About 20 per cent of borrowers currently pay their lender's standard variable rate – though not all providers have yet said they will cut this – while a further 30 per cent are on tracker deals, where the rate they pay moves up and down automatically in line with base rates.
However, 50 per cent of borrowers are on fixed-rate deals, which are unaffected by the base- rate cut. Once these short-term deals expire – about 1.5 million will do so this year – borrowers will either have to arrange a new fixed rate, facing rising prices, or move on to their lender's standard variable rate, which in most cases will be significantly more costly than their current deals.
The fact that base rates have fallen out of step with the cost of mortgages prompted calls yesterday for the Bank of England to take further action. Richard Lambert, director-general of the CBI, said: "The credit crunch has created a logjam in the financial system and, although interest rates are a very useful tool, the Bank also has to look at other steps to unblock credit flows."
Andrew Smith, chief economist at KPMG, added: "With the impact of monetary policy now blunted, rates will ultimately have to fall further to achieve the same result. Rates are heading to 4 per cent over the next 12 months."
However, the MPC faces a difficult balancing act, with short-term inflationary pressures constraining its ability to cut rates aggressively. As well as rising food and home energy costs, new figures from Income Data Services suggest wage settlements are also beginning to increase. While private sector pay rises agreed in the first three months of the year averaged 3.5 per cent, in line with 2007, much higher deals were being awarded this month, IDS said, with two-thirds worth 4 per cent or more. Fears of eurozone inflation saw the European Central Bank hold interest rates at 4 per cent yesterday.
Nevertheless, the MPC statement said it believed economic concerns justified its cut, despite fears about rising inflation. "Credit conditions have tightened and the availability of credit appears to be worsening... the prospects for output growths abroad have deteriorated," it warned. This, the MPC said, "should help to keep domestic inflationary pressures in check in the medium term". The MPC also has to contend with declining consumer confidence, with falls in house prices denting morale. Figures from Tradition, an interdealer broker, will today reveal that the derivatives market is now pricing in falls in house prices for the next three years. The cost of futures contracts linked to house prices suggests the value of the average home will not rise back above its current level until 2018.
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies