New borrowers are unlikely to see much benefit from yesterday’s interest rate cut, commentators have warned.
The cost of mortgage deals for new customers is expected to continue rising despite the Bank of England’s Monetary Policy Committee reducing the base rate for the third time since December.
The mortgage market is currently changing on a daily basis as lenders reprice their loans and pull deals that are attracting too much business, and this latest rate cut is unlikely to change the problems they face.
The average cost of a new two-year fixed rate mortgage for someone with a 5% deposit hit a seven and a half year high of 6.64% at the end of last month, compared with an average rate of 5.51% at the end of November, before interest rates started coming down.
Two more mortgage lenders have announced they are increasing their rates for new borrowers, with Alliance & Leicester repricing its entire mortgage range for the second time in three days, raising its rates by up to 0.35%.
Nationwide is also hiking some of its fixed rate deals, increasing them by between 0.12% and 0.32% from today – just two weeks after it last increased the cost of its fixed-rate range by 0.2%.
The UK’s third biggest lender Abbey raised its two-year tracker deals by up to 0.35% earlier this week, more than wiping out today’s reduction.
Michael Coogan, director general of the Council of Mortgage Lenders, warned that in the current ‘dysfunctional market conditions’, the base rate was not a good guide to the cost or availability of funds to lenders.
He said: ‘To improve the market in which lenders are operating and restore consumer confidence, the Bank needs to co-ordinate successive base rate cuts with further injections of more widely available liquidity.
‘We would like to see another base rate cut next month partnered with more liquidity auctions, of higher amounts, over longer terms, and available to a wider range of institutions. This co-ordinated approach would help to show the authorities are serious about tackling the market problems.’
But even existing customers may not benefit from the full quarter percentage cut in the official cost of borrowing.
People with tracker mortgages will see their rate automatically move down in line with the reduction, but lenders do not have to pass on the cut to people on standard variable or discount deals.
Halifax, Nationwide, Cheltenham & Gloucester, which is part of Lloyds TSB, Barclays’ mortgage arm the Woolwich and First Direct were quick to announce they would be mirroring the MPC’s decision and reducing their SVRs by the full 0.25%.
They were later joined by the Royal Bank of Scotland and NatWest, which are part of the same group, with these also passing on the cut in full.
Earlier this week HSBC announced it will look to match homeowners’ existing fixed-rate deals – including rates as low as 4.54% – for a further two years.
The offer, which starts on Monday for a limited period, is subject to restrictions and a fee, while borrowing will be limited to 80% of the value of the property. In line with all HSBC’s mortgages, the product will not be available through brokers.
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