All quiet on the base rate front

A year on from the collapse of the Icelandic banks and the surprise early rate cut from the Bank of England, Clare Francis looks at how the mortgage and savings market has developed since...

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Clare Francis: Interest rates have been kept on hold again this month and have now remained unchanged since March, but think back to this time last year and things were rather different. It was last October when we had the surprise half-point rate cut as governments and central banks around the world joined forces in a concerted effort to tackle the growing financial crisis.

Here in the UK it marked the beginning of the aggressive rate cutting cycle that ended in March. During that time we saw base rate plummet from 5% to just half a percent where it currently stands. This sharp reduction in rates hit savers hard, and while some degree of calmness has been restored, interest rates remain at an historic low.

You may think this is bad news for savers, but actually as Kevin Mountford explains, this isn’t necessarily the case.

Kevin Mountford: We are finding ourselves in this flat base rate environment which on the face of it, it doesn’t seem great for savers but I think if we look closely the situation is maybe a lot better then we anticipated.

First of all, let’s just go back 12 months. Absolutely amazing time in the worlds of savings, albeit a nervous time for most of us, we saw the collapse of the Icelandic banks and prior to that we actually saw really aggressive savings rates coming in the market and I think now looking back we realise that these were artificially inflated, purely so that the banks - in times of desperation - got as much of our savings in as they possibly could.

What you have to keep in mind now is the base rate at that time was 5%, and so although there were some really good rates, a lot of these rates on offer were actually below bank base rate. So, it seemed great to the customers but in real terms wasn’t great compared to market conditions.

12 months on we have suffered greatly in savings – we’ve seen base rate go from that 5% down to 0.5% at the start of this year, and as I said, has pretty much remained flat since. But, in real terms the savings rates we have seen now in the market are actually paying way above bank base rate, several times more, with Easy Access [paying] 3%, we’ve seen short term fixed, medium term fixed, now [paying] over 4%.

So in reality it absolutely is a good time to save. We’ve got the Mini Isa season now for the over 50’s, and for those over 50 who actually pay tax the first thing you should be doing is taking advantage of the increased allowances.

The worst thing we can do is relax thinking it just isn’t worth saving because there’s good rates out there; and in terms of real return on that investment against bank base rate, against inflation etc., it is a good time to switch and get the most out of your savings.

CF: And what is happening to borrowers? The problems in the mortgage market have been well documented, with many people struggling to get a mortgage. However, recently we have had some indications that thing maybe beginning to improve.

Last week HSBC announced a further £500million of funding for mortgages up to 90%, and lenders including as Abbey and Woolwich have trimmed some of their rates in recent days.

Earlier this week we hosted a webchat with Nici Audhlam-Gardiner, Director of mortgages at Abbey, and David Hollingworth, who is an advisor at L&C mortgages an independent broker. Here’s what they had to say about the outlook for the mortgage market.

CF: [reading viewers question] What’s the mortgage market going to be like in 2010, are we going to see much higher loan-to-value (LTV) mortgages on offer again? What are the prospects for buy-to-let mortgages?

What’s going on at the moment - is it getting easier?

Nici Audhlam-Gardiner: I think the critical thing as you say is what happens to house prices, so we’ve seen a few months of sustained house-price increases, both from the Halifax and Nationwide index.

However there are some question marks as to whether that will continue, and the reason why is that there is quite a small market at the moment, so a number of people have put their houses on the market because they’ve seen that there are some good deals and potentially some interest - a number of people who potentially are cash buyers have gone into the market - but it’s not a normal market as you might have seen a couple of years ago, so will that dry up or will that continue, that’s the big question.

 If it does continue – which we’re very much hoping it will do – they I think we will see some more lender appetite coming into the market and particularly at the higher LTV so lenders will be very comfortable to lend if they can see a period of rising house prices.

CF: Because, David, one of the problem has been that a lot of people – even if they’ve been willing to transact and try and buy at the moment, but they’ve just not been able to get a mortgage have they?

David Hollingsworth: Yes, the big turnaround has been the big deposit you need now, and whilst there are some more encouraging signs - like you say, just this week some of the rates are getting better – they are still generally been focused on the lower LTV, so lower percentages of the property value.

So that does mean that you need in many cases 25% to put down to get hold of the better rates. There are deals at a higher LTV, but there’s still quite a steep and sharp step up in terms of rate.

CF: So we may be in the calm after the storm but this doesn’t mean that there is nothing happening in the savings and mortgage markets. If you are a saver there are some great deals to take advantage of at the moment, and as far as borrowers are concerned, if you have been struggling to get a mortgage the early signs are that things may be starting to improve.

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