Further base rate cuts needed to reduce mortgage costs

Despite a swift reduction in interest rates by leading mortgage lenders, Halifax and Nationwide, the cut in the Bank of England’s base rate to 5.5% is unlikely benefit homeowners immediately.

The London Interbank Offered Rate (Libor), the rate at which banks lend money to one another, remains at 6.65%, a nine-year high, and banks raising funds on the wholesale money markets are looking to their profit margins.

Libor has been above the base rate for the last four months and even if it were to decrease by 0.25% to 6.4%, the discrepancy remains large.

Financial experts are warning that further cuts in the base rate will be needed early in the New Year to reduce the margin and make mortgages more affordable.

While Halifax, the UK’s largest mortgage lender, has already reduced its standard variable rate (SVR) from 7.75% to 7.50%, Katie Tucker at mortgage broker John Charcol points out: “its SVR was pretty hefty anyway and is still higher than Nationwide’s which dropped to 6.99% shortly after the MPC decision.”

In addition, while homeowners with tracker mortgages will see an immediate reduction in mortgage costs, existing borrowers on discounted-variable rates may not see the full reduction.

According to Richard Donnell, director of research at Hometrack, the property website, the base rate cut will increase confidence in the housing market but “buyers are still going to remain price sensitive and this will result in a continuing slowdown in house price inflation over 2008″.

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