One of the staples of the mortgage industry has always been that the base rate should be as low as possible – low interest rates mean mortgage finance is cheap, thus reducing repayments and ensuring that home owners have plenty to spend and the housing market remains buoyant.
But that was before the credit crunch, the closure of wholesale funding markets and interest rates hitting the lows we see today.
The closure of the wholesale markets meant that lenders found that a major source of mortgage funding dried up overnight. As a consequence, personal savers took on greater importance for them.
Of course, this has always been the case for building societies. Mutuals are forced by legislation to raise at least 50% of their funding from savers and in practice savers have provided 70% of societies’ funding, with only 30% coming from other sources.
With funds from savers now representing such an important source of funding for mortgage lending it is imperative that institutions, whether they are societies or banks, are able to raise funds for future mortgage lending from savers.
But the drastic cuts we have seen in interest rates in the past year have compromised the interests of both savers and borrowers.
Although not all the cuts in the base rate have been passed on to savers by lending organisations, savers have seen their incomes fall by as much as 75%. Of course, this has particularly serious implications for pensioners and others who depend on their savings to maintain their lifestyles. Clearly, borrowers who have tracker mortgages or those on lenders’ SVRs will have benefited from the recent cuts in rates. But with rates now so low, what is of concern to mortgage borrowers is product availability rather than cost.
Every quarter we interview more than 1,000 members of the public to see if they believe it is a good time to buy a home and ask what the biggest barrier is to doing so.
In June 2008 we found the biggest barrier to home ownership was meeting monthly mortgage repayments, with 70% of respondents identifying this as the most significant problem. By Dec-ember, only 37% of respondents claimed this was the case.
Instead, concerns over getting hold of a mortgage – or a large enough mortgage – emerged as the biggest barrier, increasing from 49% to 56% over the period.
So mortgage availability rather than the cost of mortgages has become the most pressing issue in the past few months. This suggests that what is most important at the moment is to maintain the flow of mortgage funds to the market rather than to reduce interest rates further.
That’s why we need to ensure that those with at least some capacity to supply funds for mortgage lending – in other words, personal savers – are encouraged to do just that. And this in turn means the Monetary Policy Committee will have to refrain from making further cuts to the base rate, at least until the effect of recent reductions becomes clear.
This is especially important as there are signs emerging that buyers are coming back. Our recent survey shows that an increasing proportion of consumers think this is a good time to buy property – some 46% believed it was a good time to buy in December compared with just 27% in June.
This is no doubt a reaction to the fall in property prices in the past year or so, meaning more people think that they can pick up bargains.
This trend is supported by a number of other surveys that show interest in buying homes is increasing, including one from the Royal Institution of Chartered Surveyors.
So potential buyers think the time is right while relatively low mortgage rates mean finance is affordable. What’s stopping them from buying is the lack of mortgage availability, as lenders are reluctant to lend since the supply of funding is so disrupted. It’s time to encourage personal saving.