Mortgage rates fall as interest kept at 0.5% for eighth month

Published 09th Oct 2009

Banks launch better deal for borrowers as gulf between base rate and mortgage rates begins to close

Competition is starting to push down interest rates on mortgages, brokers said , as the Bank of England left the bank rate at a record 0.5% low for the eighth month running.

The gulf between mortgage rates and the base rate has been a feature of the credit crunch as banks have tried to restore their profit margins.

But this may be starting to change, according to Ray Boulger of broker John Charcol. "Over the last few days we have at last started to see some real competition from lenders, albeit primarily for lower loan-to-value business," he said.

"Woolwich, Northern Rock, Abbey, Alliance & Leicester, Principality and Coventry have all announced cheaper deals this week which is good news for borrowers."

The lower mortgage rates have been driven by falling "swap" rates, which govern fixed-rate mortgages, and lower Libor rates, which guide floating rates.

Libor, the rate at which banks lend to each other, has been falling steadily in recent months and is now at a record low, just above base rate.

Swap rates have been pushed lower by the recent Bank of England decision to extend quantitative easing from a planned £125bn of asset purchases to £175bn.

By buying huge quantities of government bonds, or gilts, the Bank has pushed down the effective yield on them, in turn weighing on swap rates in money markets.

Woolwich is now offering a lifetime tracker at Bank rate plus 2.29%, currently 2.79%, although on mortgages with a maximum 70% loan-to-value ratio.

The news came as the Council of Mortgage Lenders estimated that around 100,000 people each month are coming to the end of fixed-rate deals and reverting to their lenders' standard variable rate, which is usually are far lower than the rate they had been paying.

The group's figures show that someone who took out a fixed rate mortgage two years ago paid an average rate of 5.7%. Now lenders' standard variable rate is an average of just 3.9%, while major lenders Nationwide and Lloyds TSB, including Cheltenham & Gloucester, have SVRs of just 2.5%.

The City had widely expected the Bank of England to leave the bank rate on hold this month. Next month, though, could see an extension of quantitative easing, say analysts, because the monetary policy committee will have prepared its quarterly inflation report for November and will be able to assess whether the economy is recovering, or needs more stimulus.

This week has seen stronger figures from the economy's dominant services sector but industry seems to be heading back into recession.

Stephen Boyle, head of RBS Group Economics said: "Next time will be trickier. In an Inflation Report month, the MPC will have to decide whether recent signs of recovery are the first rays of light in a sustained recovery, allowing a suspension of QE, or a false dawn, necessitating further stimulus. There might not be fireworks at the November 5th meeting but the stakes will be higher."

Businesses urged the Bank to do more to prevent the economy sliding back into a deep downturn.

David Kern, chief economist at the British Chambers of Commerce, said: "There is worrying evidence that earlier hopeful signs of improvement in the economy are weakening. To counter serious risks of relapse, we urge the MPC to raise the QE programme to £200bn."

The Bank's wait-and-see approach was echoed in Frankfurt, where the European Central Bank left interest rates at 1%.

Source: ' 'Guardian' '

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