Banking News Will A Bank Of England Rate Cut Really Cut Mortgage Costs 1537

Will a Bank of England rate cut really cut mortgage costs?

08 May 2008 / by Joy Tibbs
There has been a great deal of mixed opinion over the Bank of England base rate decision, due to be announced today.

Fears over rising inflation have persuaded some experts that the rate will be held at five per cent; however, others feel that a rate cut is inevitable to keep economic growth on track.

The Bank of England’s Monetary Policy Committee decided to cut rates by 0.25 per cent last month, the third rate cut since December 2007, when the rate was 5.75 per cent. Many homeowners will be hoping that a rate reduction will ease mortgage pressure in the face of rising living costs and tighter lending conditions.

The Council of Mortgage Lenders (CML) has released data showing how a notional quarter or half point cut, if implemented on mortgage rates, could affect mortgages of various sizes based on a typical average variable rate in February 2008.

It claims that for 25-year mortgages with a loan value of £250,000, a quarter point cut would make a monthly difference of £38.30 to homeowners with repayment mortgages and £52.08 on an interest-only mortgage.

And if a more dramatic 0.5 per cent cut was implemented, the difference on a £250,000 mortgage would be £76.18 on a repayment mortgage and a £104.17 reduction on interest-only mortgages. However, homeowners will only benefit if mortgage providers pass on any rate cut.

“It should not be assumed that such a rate cut will automatically be forthcoming: lenders’ rate setting decisions will depend on their funding costs and not simply the level of the Bank base rate,” explains the CML in a statement.

The CML’s News and Views article, published yesterday, explained why mortgage lenders are not passing on Bank cuts. “The reality is that, contractually, lenders retain the right to widen or narrow their margins and are free to do so at different times in the economic cycle, unless a borrower has a loan that tracks a particular rate.

“In fact, mortgage rates reflect a wide range of factors, in particular the cost of funding and business margins in a competitive market, and not just the rate set by the Bank. The situation is complex and reflects a number of pressures on lenders.”

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Written by Editorial Team