What's in store for borrowers and lenders in 2009 - 06.01.2009

Author: Steve Olejnik Posted on: 06 January 2009

Well, all eyes are on the MPC announcement on Thursday and, as mentioned on this Blog on 19th December, I still feel that we are in for a further 1% cut this week with rates falling below 1% in the first half of this year. Debate is rife with the Chamber of Commerce calling for aggressive cuts following increasing fears of unemployment and the Shadow MPC calling for rates to be held whilst the government enforce and introduce other measures to ease liquidity and instil confidence within the financial sector. RBS Treasury are predicting 2 lots of 0.75% cuts bringing rates to 0.5% over the coming months.

In my opinion, I believe the Bank of England should continue to use the tools it has available and I expect that we will see rates at their lowest for some 300 years. Rate reductions will help the majority of borrowers on tracker mortgages and will slowly help to bring down the cost of borrowing in the market. 3M LIBOR has fallen to 2.8% in anticipation of a rate reduction on Thursday and all eyes will then be on how quickly (or slowly) the gap between Base Rate & LIBOR reduces. SWAP rates will also look attractive and in a normal market we would expect to see competitive 3 and 5 year fixed rates and finally products available which make a buy to let remortgage an option.

Do not however expect mortgage rates to change drastically and fall much lower. Borrowers should also seek advice from their Broker as to whether buy to let fixed rates are suited to the individual’s requirements but if you are looking to fix, I would seriously consider looking at the fixed rates available shortly after the Base Rate reduction. If you are taking a long term view, rates can only go one way in the medium term and it makes sense to lock in before SWAP rates start to go up.

I did say “in a normal market” and the Government still has some work to do to actually get the lenders lending properly again. Where the Shadow MPC has a point is that the Base Rate reduction has not had an effect on liquidity in the banking system. I agree that in conjunction with the Base Rate reductions, the Treasury must move forward with the initiatives already put in place and look to increase assistance immediately. The Special Liquidity Scheme (SLS) has had some effect and will continue, but the recapitalisation of the banks needs to be addressed and probably increased if we are going to get the Banks working again. Implementing James Crosby’s recommendations around credit guarantees should also be high on the agenda.

In the short term, borrowers should expect lenders to have stricter guidelines and robust underwriting processes. As well as the liquidity issues, lenders are focussing on their increasing arrears book, debt management and in turn their attitude to risk for new borrowing. As a result, prime, low-risk borrowers are being tarred with the same brush and are currently finding it hard to get through initial underwriting. This will hopefully be a temporary tightening in lending appetite and should relax over the coming weeks.

So, work to do on all sides and actions over the next few days and weeks will shape the mortgage market over the medium term. We will continue to keep you updated on movements in the market and available products. In a complex money market, it has never been more important to get advice about your mortgage options. Our Consultants are on hand to assist with your borrowing needs and keep an eye out for further Blogs and e-mails over the coming days and weeks.