Rate cuts have limited success

The Council of Mortgage Lenders have released statistics showing a slight increase in the level of mortgage lending in October. Gross mortgage lending was £18.7 billion, up from the £17.5 billion lent in September, but down 44 per cent compared to the same month a year ago when the figure was £33.4 billion. Whilst many in the mortgage industry hoped that the 1.5 per cent reduction in the Bank of England base would stimulate the market, economists now feel the best that can be hoped for is a halt to the further declines.

Both economists and commentators have today been calling for further reductions in the Bank of England base rate, in the hope that this will ensure the stabilisation and eventual recovery of mortgage lending. Whilst there appears to be some easing of criteria and some reasonably attractive rates, caution is urged. Regardless of the level of interest rates, those who are worried about unemployment are unlikely to commit to a mortgage, especially when the value of the property they are buying may well be less in the near future.

However, hoping for any recovering in mortgage lending, and therefore the housing market is particularly optimistic at the present time. It is almost comical watching Alistair Darling and Gordon Brown getting every more cross with mortgage lenders who do not seem to be taking the government's objectives seriously, even though they have benefited from taxpayers money to a huge extent. Each reduction in interest rates is met by a squeal of protest from the Council of Mortgage Lenders, to be followed days later by the Chancellor summoning those at the helm of the major banks for a chat.

In practice, it is unlikely that any amount of interest rate cuts, or any amount of arm twisting from the Chancellor or Prime Minister will have the desired effect. For there to be an improvement in mortgage lending volumes, and therefore the housing market, lenders need to lend to different people and not just to the same people at cheaper rates. Currently, there are some very attractive schemes for those with high deposits, with a number of lenders offering short term fixed rates as low as 3.99 per cent, but these are of little use to first time buyers when the minimum deposit is often 40 per cent of the property value. Whilst many lenders can quite honestly tell the Chancellor that they are on message, and offer loans of up to 90 per cent, the Chancellor would do well to look a little closer. The Chancellor might like to ask certain lenders what percentage of applicants actually qualify for their high loan to value offerings, or in other cases, ask why arrangement fees cannot be added. He might also ask why the vast majority of interest rates for mortgages of more than 75 per cent are between three and four per cent above the Bank of England base rate.

The truth of the matter is that whilst reductions in interest rates may help stimulate some areas of the economy, and will certainly lead to cheaper mortgage payments for those with substantial equity, it will do nothing to encourage buyers back to the market. It is only the most naive who hope for a return to the lending landscape of eighteen months ago, but for there to be any appreciable improvement, the government have got to find some way of making lenders realise that they have to start lending to first time buyers with small deposits, and at competitive rates.

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