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Mortgage market may not see 1.5% rate cut

06 November 2008 / by Rebecca Sargent
Despite the fact that the Bank of England has cut the base rate by 1.5 per cent to 3 per cent, experts are warning that the mortgage market may not be affected for the better.

In fact, the Council of Mortgage Lenders (CML) has warned that mortgage lenders may not pass the rate cut on to home owners. In an explanation, the CML stated that:

"The real cost of funds to lenders is determined not by the Bank base rate, but by their own cost of borrowing. And their cost of borrowing depends on what they need to pay savers to attract deposits, as well as how much it costs them to borrow from other banks or the money markets, and the costs of holding capital and sufficient liquidity."

Senior technical manager of mortgage brokers at John Charcol, told The Telegraph readers that it is the Libor (London Inter Bank Offered Rate) that is causing the problems in the mortgage market because it has been slow to fall.

"With the cut to 4.5 per cent, Libor hardly moved for a few days and then started falling, but only slowly. It has now fallen by the full 0.5 per cent but took nearly a month to do so."

And, it is this delay that is causing the problems, says Mr Boulger, "The abnormally large spread between Bank Rate and Libor is the main reason why lenders have increased the margin above Bank Rate for new tracker mortgages and not passed on the cuts in full – or not at all – on their standard variable rate."

In fact, tracker mortgages are already being withdrawn, even before the base rate decision is announced, with leading mortgage lender Lloyds TSB announcing, "We are currently reviewing our tracker mortgage range" and Barclays' mortgage arm, Woolwich stating that its tracker mortgages are not currently available.

Commenting on the ongoing dispute between mortgage lenders and the Government that arises from Bank rate cuts, Louise Cuming, head of mortgages at said: "On one side the Chancellor has asked lenders to continue to lend, and be nice to those borrowers in arrears to support the flagging housing market.

"On the other hand lenders want to do anything but lend. Such is the dearth of supply in the mortgage market that any lender with a half good product is immediately swamped by applications."

Commenting on the banks' continued reluctance to lend she added: "If anything they'd like to shrink their mortgage books over the next few months, whilst they are struggling to find funding."

Nevertheless, despite temporarily withdrawing its tracker mortgage range, Lloyds TSB and C&G has pledged to cut its standard variable mortgage rate (SVMR) in line with the base rate cut, indicating that there is hope for the mortgage market yet."

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