Base Rate: Just waiting it out

Wednesday 21st October 2009

By Michael White, chief executive of online mortgage adviser, Email Mortgages

Ever since the Bank of England’s Monetary Policy Committee cut Base Rate to its historical low of 0.5 per cent in March this year, speculation has grown and grown about when it would choose to introduce its first increase.  We are now nine months into a 0.5 per cent Base Rate environment and there seems little likelihood of any increase in the next three or possibly six months at least.

Earlier this week the Centre for Economic and Business Research issued its latest prediction for Base Rate and suggested it is likely to be 0.5 per cent until at least 2011 and below two per cent until at least 2014.  A few months ago I would have thought this prediction slightly unhinged but as time goes by the chances of a much lengthier period of Base Rate being 0.5 per cent grow, by definition, ever greater.

As a mortgage adviser it is vitally important that we factor in the client’s own thoughts on where Base Rate might (or might not) be heading and weigh up their preferences in terms of product choice.  I have to admit that back in quarter two this year I thought it likely that Base Rate would have at least inched upward by a quarter of a point before the end of the year.  Given those assumptions it seemed obvious to advise clients to look at the range of low fixed rates that were available.

Times change however, and with Base Rate looking unlikely to be increased any time soon, it is shorter-term tracker deals which draw the eye and will in all likelihood provide greater value.  Of course those who are currently sitting on very low SVR rates will see little incentive to move either way – the remortgage market is in the doldrums for this very reason and we should expect purchase activity to dominate while this is the case.

While many borrowers – let’s leave the needs of savers out of this for now - might believe that a 0.5 per cent Base Rate environment continuing for many months to come is a good thing, I would contend that we should all be hoping for an increase in Base Rate sooner rather than later.  Firstly, Base Rate at 0.5% is not ‘normal’ and therefore we are still living in particularly fragile and quite precarious economic times.  When the MPC increases Base Rate we will finally be able to say that we are on the road to recovery out of this recession, a fact that will be good for everyone.

Secondly, an increase in Base Rate should signal a kick-start to the mortgage market. Lenders will raise SVRs and borrowers who have been able to sit back and do nothing will undoubtedly feel that rates can only go one way (albeit slowly) and they should again start looking for a special rate.  We should at this point be moving to a rather more normal and healthy lending environment as well.  At present those lenders with money to lend are making hay while the sun shines; as the only show in town they are charging considerable margins and using the lack of competition as a means to boost lagging balance sheets.

Borrowers should be reminded that a one or two per cent increase in Base Rate is not going to mean a corresponding increase to the rates currently being offered; borrowers therefore have no reason to fear it.
For example, a first-time buyer who might only be able to get a mortgage with a rate of six per cent now, is not going to be confronted with a market of eight per cent products should Base Rate increase by two per cent.  Lenders will not price in this way; the margins will be slimmed to ensure they do not price themselves out of the market.

Unfortunately, it looks unlikely that we will have any welcome news soon. The economy is still struggling and we have yet to see any firm evidence that the recession is truly over.  Until we do, we should all just be hoping for that elusive increase at some point during 2010.

Michael White is both founder and chief executive of online mortgage advisers, Email Mortgages. Email Mortgages was established in 2008 and is a mortgage advisory practice providing consumers with tailored fee-free advice online via email.  Michael has been working in financial services for over 30 years and been involved in a number of new business start-ups including Chase Manhattan Homeloans, Legal & General Mortgage Services and Kensington Mortgage Company.  His last job prior to Email Mortgages was as founding director of the lender London Mortgage Company, established in 2001 and sold to Lehman Brothers in 2006.