Swift Money

Cuts to the base rate of interest may not lead to lower repayments for mortgage holders. Speaking after the Monetary Policy Committee’s (MPC) decision to hold the base rate in January, Motley Fool’s David Kuo said:

“The link between the MPC’s decisions and mortgage payments is by no means certain.”

Despite Chancellor Alistair Darling urging mortgage lenders to pass the December cut on to consumers, there is no obligation for them to do so.  Following the credit crunch, the main aim for many financial services organisations is to stabilise their business.  On this, David Kho added:

“Many homeowners are unlikely to reap the benefits, even though there are indications that the Bank of England may continue to cut interest rates to stimulate the flagging British economy.” 

The availability of self-cert mortgages has been largely unchanged by the credit crunch, despite the wide reporting of tightening lending conditions in the mortgage market. The credit crunch has affected the sub-prime sector and non-conforming lenders, with mainstream lenders mainly unaffected. 

Andy Pratt of mortgage brokers Alexander Hall stated that borrowers with good credit records should have few problems being approved for a loan:

“All those clients who would have been able to get them even with the credit crunch.”

According to the Economic and Social Research Council 13% of Britain’s 29million workforce are self employed and therefore eligible for a self-cert mortgage.

The Bank of England decided to hold base rates in January 2008, a decision that could prove more expensive for mortgage owners. Many industry experts believed a base rate cut to be justifiable this month, moreover, due to negative economic statistics most expected a rate cut.  John Charcol’s Ray Boulger said:

“Homeowners could find themselves paying £105 more in interest than they would if a 0.25% cut had been implemented.”

Inflationary pressures such as Npower’s 17% price increase could prove financially difficult for Britons. However, inflation is under control with the consumer price index inflation just above the 2%, with the global economic slowdown likely to bring it down further.  With regards to further rate cuts, Boulger added:

“If the monetary policy committee delays the next cut too long, Bank rate may have to fall further than would have been the case with an earlier cut.”

A survey published by the Bank of England shows that nearly one million families are struggling to keep up with mortgages repayments with 1.8million people saying they have problems “at least occasionally”.  Figures show that rising interest rates have increased homeowners’ yearly mortgage payments by a total of £3.6 billion in the last year.

The poll in the Bank’s Quarterly Bulletin took place in September when the global financial crisis was in its early stages. Since then the situation has deteriorated and is expected to deteriorate significantly as the global credit crunch prompts banks to tighten their lending criteria.

Many households are cutting spending and borrowing as interest rates remain high.  Half of families who face increasing mortgages repayments plan to cut spending, while 10% have taken on more debt or extended their mortgages. On top of this, 10% of people have had to take on a second job or work overtime to make mortgage repayments.

The survey showed that those renting have more trouble repaying their debts compared to homeowners.  Around 28% of renters had trouble with debt repayments “at least occasionally”.

Chief economic adviser of The Confederation of British Industry said “while the slowdown may appear dramatic set against this year’s strong growth, the fundamentals of our economy remain sound and talk of a full blown recession is exaggerated”.