The post-Brexit Bank of England’s base rate (BBR) cut signalled in the MPC’s July minutes was confirmed in August. There was a sense drastic action had to be taken in the Bank’s efforts to shore up financial and economic stability in the UK.
Nevertheless, many borrowers look set to enjoy cuts in their mortgage rates following the reduction in BBR from 0.5 per cent to a new historic low of 0.25 per cent. Table 1 shows the effects. How quickly lenders will pass the cut on is subject to some speculation with the CML pointing to “a range of factors” and “changing market conditions” as influences on the rates borrowers pay.
This is evident in the variation in the average rates paid over time, with the average mortgage rate dropping from 3.83 per cent to 2.9 per cent from March 2009 to July 2016, while BBR remained unchanged at 0.5 per cent.
Factors
The CML also explains the relationship between BBR and mortgage rates is not clear cut nor predictable, listing factors – including the cost to the lender of borrowing funds, the cost of holding the required amount of capital and the design of the product – that determine the rates charged. Ultimately, it points out a rate cut does not automatically feed through to mortgage rates on a like-for-like basis and future pricing is a matter for individual lenders.
However, there is another influential factor – competition in the market. With a view to strongly encouraging lenders to pass the rate cut on immediately, Mark Carney, governor of the Bank of England (BoE), also announced a term funding scheme, which allows lenders to borrow at near base rate levels. Consequently, he said that lenders had no excuse for not passing the cut straight on to their borrowers.
In the initial aftermath of the rate change some lenders altered their rates straight away, while others said they would wait until October. The Bank has since made it clear that this is not acceptable.
How strongly the pressure of competition, or the disapproval of the BoE, is likely to influence lenders’ decisions is difficult to tell. But many borrowers are tied in to a short-term deal and would suffer penalties if they attempted to walk away in protest. So borrowers – particularly those on deals contractually linked to BBR, such as tracker mortgages – are likely to enjoy the rate cut in the next couple of months or so. But this is in contrast with households that rent.
A report from the Equality Trust How Unaffordable Housing Drives UK Inequality, points out that rising rents mean many who cannot afford to get on the housing ladder face higher housing costs than homeowners.
A report from the Resolution Foundation The Housing Headwind – The Impact of Rising Housing Costs on UK Living Standards, makes the point that although rates are at historically low levels, rising prices, changing tenure and cuts in housing subsidies have increased costs for working age households.
Rental households
Many are unable to buy their own homes and have no option but to rent – often privately. The foundation reports that private renters consistently spend a higher proportion of income on housing than any other tenure group.
Mortgaged households are not exempt from the issue of high housing costs in light of low earnings growth and failure to address the housing shortage. There are vulnerable mortgaged households too. The Foundation’s report points to households with larger, more recent mortgage liabilities. It says that even in the current benign interest rate climate the stock of debt held by mortgagor households remains an important determinant of the housing cost-to-income ratio. Both reports conclude that a drastic rethink of housing policy needs to take place.
The decision to cut BBR appears to have been largely welcomed. The National Institute of Economic and Social Research, for example, suggested that the MPC’s policies, which also include a return to quantitative easing and the purchase of corporate bonds, could stimulate the economy by 0.5 per cent over the next two years.
It also noted, “There are significant uncertainties around the transmission of these measures to the real economy…” Meanwhile, the housing affordability issue will not go away by itself and economically vulnerable households with high levels of debt remain a serious concern for the UK’s financial stability.
The worst that could happen is that the action taken has little or no impact. However, both Mr Carney and the new chancellor, Philip Hammond, have made it clear that they are prepared to take further measures if the economy does not begin to recover.
True to Mr Carney’s word, the BoE is putting in place the main elements of its “clear plan” to stabilise the UK economy after the Brexit vote. How effectively it is working remains to be seen.
