The unprecedented cut in Bank rate from 5% last October to 0.5% today has had a dramatic effect on income for lenders – as well as on borrowers and savers – leaving them with little scope to lower discretionary mortgage rates further.
With the wholesale funding market still paralysed, savings are all lenders can use to fund mortgages. Unless lenders are able to offer competitive rates to savers, their ability to offer new mortgages will be further restricted.
We have argued that the impact of very low interest rates on the volume of saving overall – and on the volatility of flows of savings funds into and out of individual institutions – is potentially a source of even greater instability in the mortgage market.
The flow of funds into National Savings and Investments (NS&I) in recent months has sucked more money out of the mortgage market. The first three quarters of last year saw a sharp increase in funds flowing into NS&I. Gross inflows for the three successive periods totalled £4 billion, £5.7 billion, and £9.6 billion.
For most borrowers, the cost of their mortgage is not an issue at current rates. Of much greater significance for the mortgage market is the continuing shortage in the supply of funding, with low rates now a contributory factor to instability. The other key issue is the continuing decline in demand for mortgages. Demand has been weakened by declining confidence in the economy and the continuing downward movement in house prices.
