Commenting on yesterday’s decision to keep interest rates on hold for the 28th consecutive month, he said: “As the markets become increasingly worried about the growing intensity of the Euro crisis, caused by the fundamental flaws in its concept and hence impossible to solve on a permanent basis, the likelihood of the MPC increasing Bank Rate any time soon diminishes.
“The question now is not whether Bank Rate will increase this year but whether it will increase next year.
“In last month’s statement from the US Fed after its equivalent meeting to the MPC it took the opportunity of highlighting its “dual mandate” of fostering maximum employment and price stability. It also said that “economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate for an extended period,” an interesting contrast to the ECB approach but similar to recent comments from Mervyn King.
“It may be helpful for the Bank of England to stress its dual mandate more overtly than it has done in the past.
“On the mortgage front the lower swap rates resulting from the market reassessing the likely timeframe of economic recovery and Bank Rate increases has allowed many lenders to cut their fixed rates over the last month. Although most lender promotional activity is focussed on 2 year fixes, primarily because many now have a more eye catching sub 3% interest rate, these offer little value for anyone who shares our view that Bank Rate will not rise until at least well into next year and even then only slowly.
“We think the choice most borrowers should be making is either to be on a good variable rate or to look at a 5 year fixed rate now several lenders are offering sub 4% 5 year fixes. However, we think there is no rush to fix for borrowers on low variable rates, but anyone whose variable rate is above 3% should consider switching their mortgage, subject to having a reasonable amount of equity in their property.
“One other positive feature of the mortgage market over the last few months has been an increasing appetite to lend from some lenders and more competition in the higher LTV end of the market, which is now even extending to a few innovative deals up to 95% LTV from lenders who employ sensible human underwriters to consider applications rather than taking a “computer says no” approach.
“For example we have this week launched two 95% LTV mortgages, aimed at different segments of the market. The innovative feature on one is that it is available to first-time buyers who have been renting for at least a year and affordability is calculated by reference to the amount of rent being paid. The innovation on the other is that it is a Family Offset with 20% of the purchase price needing to be deposited by one or two family members, meaning that the lender’s risk can be based on a 75% LTV mortgage. As a result the interest rate for this 95% LTV mortgage is only 3.95%. The borrower pays interest on the whole 95% borrowing but is only actually charged interest on 75%, resulting in the outstanding mortgage balance reducing much quicker than would normally happen, a benefit increased by the fact that the interest rate is much lower than would otherwise be the case for a 95% LTV mortgage.”
