Posted on 13 June 2011 by Drew

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• An extended period with Bank Rate at 0.5% looks increasingly likely
• Biggest focus of interest this month will be on how newbie Ben Broadbent votes

Ray Boulger of leading independent mortgage adviser John Charcol comments on the news that the MPC left Bank Rate unchanged today for the 27th consecutive month at its lowest ever rate of 0.5% and also left the amount of Quantitative Easing unchanged.

“Last week’s very weak manufacturing figures from both sides of the pond, but particularly in the UK, coupled with higher than expected Government borrowing in April, adds significant weight to the view that the economic recovery is going to be very protracted. Despite many economists having already revised downwards their original 2011 GDP forecasts some further downward revisions look likely.

“Notwithstanding the modest increase in wage growth last month, the other increasingly negative economic statistics all point to an extended period of very low interest rates. This has been reflected in falling gilt yields and swap rates, with 5 year swaps having now given up half of the increase seen since hitting their all time low of 1.99% at the end of October last year.

“One of the few sectors of the economy not going into reverse is the housing market, although this is probably because activity levels had already fallen much further than in most other sectors. Despite there being no sign of any significant improvement in the volume of transactions, house prices on a national basis appear to have not only bottomed out after moving lower in the second half of last year but to actually be staging a modest recovery, although it must be highlighted that there are significant regional variations.

“Based on the real, i.e. not seasonally adjusted, Nationwide House Price Index, house prices bottomed out in February 2009 after falling 20.6% from their October 2007 peak. What was unusual about this decline was not only its speed (over 20% in 16 months is far quicker than the decline in the early 1990s bear market) but also the fact that prices fell in every single month during that 16 month period. The trend then reversed until June 2010 and in the 16 months to June 2010 (exactly the same period of the previous decline) the index increased by 15.1%. Another trend reversal then took place but this time only for 8 months, with prices slipping back by 5.2% in the 8 months to February this year. Since then much of that modest decline from June last year has been retraced, with prices increasing by 3.7% in the last 3 months. In the first 5 months of this year prices are 3.1% up, leaving prices a net 10.1% down from their October 2007 all time peak.

“Mortgage availability is improving in some areas, particularly for loan to values (LTVs) above 75%, as is pricing across the board. For example the sub 4% 5 year fixed rate has returned, with four lenders now offering 5 year fixed rates under this psychologically important level, and Coventry Building Society has this week launched a flexible first time buyer 5.99% 5 year fixed rate (5.85% if the borrower is a member of the Society, or has a parent or grandparent who is) up to 90% LTV with a low £199 arrangement fee, a free valuation and a most unusual feature – no early repayment charges!

“There has been an even bigger increase in availability and hence choice of mortgages for BTLs, with several lenders entering or returning to that market over the last year. Current indications are that BTL lending this year will increase by 15-20% within a flat market overall. With rental demand from frustrated potential FTBs not wanting or able to continue living in the family home likely to continue increasing the BTL investor is in part filling the gap left in the property market by those non FTBs. Rental yields have been rising as a result of demand for rental properties increasing quicker than investors are acquiring new properties. As rental property is valued partly on a yield basis, higher rents in some parts of the market will help to provide a floor for property prices.”

What should borrowers do now?
“The biggest decision on mortgage choice for most borrowers is whether or not to fix. A key aspect of that decision is how big a premium one has to pay for the security of guaranteed monthly payments provided by a fixed rate. With relatively little recent change in the pricing of variable rates the lower rates now available on 5 year fixes has reduced that premium to around 1.5%, a spread which is low enough to be attractive to some borrowers.

“Although 2 year fixed rates are about 1% cheaper than 5 year fixes they only offer interest rate protection for a period when it is least needed. Not only that but should interest rates increase quicker than expected a much higher price would almost certainly have to be paid to obtain another fixed rate in 2 years time. Therefore if rates stay low a variable rate will probably be cheaper and if rates increase significantly fixing for only 2 years will prove to be an expensive mistake. Thus for most borrowers choosing between a variable rate, perhaps a lifetime rate, or a 5 year fix will make a lot of sense.”



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