Mortgage market competition driven by base rate decision

Mortgage market competition driven by base rate decision

11 December 2009 / by Rachael Stiles

This week's decision by the Bank of England to keep the base rate at 0.5 per cent for the ninth consecutive month will further drive competition in the mortgage market, experts have said.

Ray Boulger, from mortgage advice firm John Charcol, deemed Bank of England governor Mervyn King's decision 'boring', but, he added, it will make the mortgage market more competitive for borrowers.

The static rate will help to further push down mortgage interest rates and arrangement fees, while pushing up loan to values and the availability of bigger mortgages, he said.

The Bank of England lived up to industry commentators' expectations again this week by maintaining the base rate at its record low, where it has stood since March, and made no change to its quantitative easing programme.

Commenting on the base rate, Mr Boulger said that even though it is currently having its longest period of stability since it spent 12 months at 4.5 per cent, ending in August 2006, several changes have been announced to the quantitative easing programme in the last nine months.

These changes are often forgotten, overshadowed by the base rate decision, he said, but this creates a distorted view of this year's monetary policy, as quantitative easing is the second of only two tools which the Monetary Policy Committee has at its disposal to influence policy.

The last month has seen how more competition has changed the mortgage market, which is particularly evident in two year fixed rate mortgage lending. While the static base rate is tempting the majority of John Charcol's customers onto tracker mortgages, those who do choose to fix are mostly opting for a two year deal, where competition is strongest.

But more important than small cuts in mortgage rates is the availability of higher loan to value deals, Mr Boulger added, which in turn has pushed rates and arrangement fees down in this sector.

Meanwhile, as Consumer Price Index inflation is expected to fall back below the MPC's target rate of two per cent, there is little pressure on it to increase the base rate, and many industry experts expect it to remain low well into 2010.

Mr Boulger commented: "The fact that George Osborne has stated on more than one occasion recently that he expects interest rates to stay low for some time indicates that he does not expect the fiscal policies he intends to adopt after a General Election victory to change the MPC's medium term outlook for interest rates."

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