This week’s 0.25% Bank Rate cut was so widely expected, following the Monetary Policy Committee’s (MPC) strong steer in its July minutes, it had already been taken into account by the market. Therefore The Bank had to do something exceptional to aim the market further in the direction it wants it to go. It did that with bells on, and the immediate reaction suggests the additional measures are having the desired effect.
Historically, the lack of cuts made to standard variable rates (SVR) following the bank rate’s drop to 0.5% in 2009 it highly likely that just a cut in the rate would have had little or no impact. Therefore, to “encourage” lenders to pass on the full 0.25% cut the MPC announced a Term Funding Scheme, which allows lenders to borrow at a rate close to the new Bank Rate, and pass on the lower rates to borrowers.
It would appear that the new measures, along with Mr Carney’s comments is having the desired effect with several of the larger lenders announcing 0.25% SVR cuts just hours after the MPC announcement. Such quick moves will pile pressure on other lenders to follow suit. I would suspect that as the MPC’s meeting concluded on Wednesday, with the decision not being announced until midday on Thursday, there was plenty of time for the Bank to contact the major banks and building societies to make it very clear how their regulator expected them to respond.
This would have been the bank’s plan, in order to drive its key message through to the public.
Another potentially interesting development for mortgage borrowers was that a part of its ramped up Quantitative Easing programme the Bank will buy up to £10bn of UK Corporate Bonds. Without going into the minutia, this could lead to some lenders launching a range of really long term fixed rate mortgages, perhaps even as long as 25 – 30 years, and maybe even sub 3%!
As a result, I expect to see more cuts in fixed rate pricing over the next few weeks, despite the Council of Mortgage Lenders suggesting that lower mortgage rates wouldn’t automatically follow on from the Bank Rate cut. Many lenders will allow applicants to switch products during the mortgage application process, so borrowers applying for a mortgage now can still benefit from any further reductions before they complete.
As well as lower rates another plus for mortgage borrowers from the MPC’s actions could be an increase in the maximum amount that can be borrowed. Lenders have to stress test mortgages to make sure that they are affordable not just now but in the future too. The stress test rate lenders use varies but most work on a pay rate of 7-7.5%.
Therefore, although the maximum loans differ from lender to lender, by reducing the stress test rate by 0.25% it should increase the maximum loan by about 3.5%. e.g. A borrower with a current maximum loan of £300,000 would see this increase to about £310,000.
One area that the bank left alone this time, is the limit of loans above 4.5x income to 15% of all lending. If The Bank is keen for lenders to fully implement the all of the options it has introduced then this limit needs revisiting to see if, in the current environment it is still appropriate.
All-in-all I see this as positive news for the mortgage market, with borrowers benefitting from even lower rates. However, it is important not to get entranced by the guiles of the 2 Year Rates, and to make sure that you obtain quality independent advice before making any decision.