Full effects of base rate cuts not yet evident

Whilst mortgage costs have fallen for some borrowers, the full effects of the cuts in Bank base rate is not yet evident according to Andrew Sentance who is a member of the Bank of England's Monetary Policy Committee. Mr Sentance was speaking at the Institute of Economic Affairs economy conference earlier this week, and explained that it would normally take between six and nine months for the full effect of cuts in the Bank of England base rate to be evidenced. In the case of the recent cuts, which amount to four per cent in five months, the time lag may be even longer.

It is a matter of fact that the reductions in the base rate have benefitted some mortgage borrowers, but there is a danger that these may be overstated. Those who are paying their lender's standard variable rate will have seen some reduction in the cost of their mortgage, with those on historical tracker rates having seen the greatest fall in monthly payments. However, those who are on fixed rates will have seen no benefit at all, and it is questionable whether some borrowers will be able to secure any fixed rate at all when their current one comes to an end.

The evidence for those seeking to enter the property market would suggest that the level of interest rates is almost irrelevant. For many, the ability to get a mortgage at any price is the main concern, with many being completely excluded from the market either because they have too small a deposit, or because their particular circumstances do not fit with the stringent criteria most lenders now operate. In addition, many borrowers who would normally seek to remortgage to another lender at the end of their introductory rate, and simply adopting a wait and see attitude, encouraged by the fear that if they lock into something now, they may miss out on further rate reductions in the months to come.

There is some evidence that those who have benefitted from lower mortgage payments are reluctant to use their increased spending power to support the wider economy. In a statement released today, the Co-Operative Bank confirms that many borrowers are using the extra disposable income to pay down mortgage debts. According to the lender, the incidence of borrowers now making overpayments to their mortgage has increased by more than fifty per cent. Andrew Sentance stated that he felt there would be further base rate cuts in future months, suggesting that a further relaxation of monetary policy may be necessary to support spending. With the Bank of England seriously considering using quantative easing to increase the money supply, there are many both inside and outside of the mortgage industry who feel that the time has now come to call a halt to base rate reductions.

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