With the Bank of England base rate standing at 5.25%, many consumers I speak to find it hard to understand why new mortgage deals are not more attractive.
But the reality is that because of the liquidity problems, the base rate has become academic – it’s the cost of money in the market that matters.
Three-month LIBOR is trading at around 5.68% so the true cost of funding for banks is higher than borrowers imagine.
Couple this with thin trading volumes, and the higher cost of funding inevitably means higher tracker variable rates.
On top of all this, Professor David Miles is forecasting that lenders will face a shortfall of £70bn in funding during 2008 unless the securitisation market is reopened by investors prepared to purchase mortgage-backed investments.
The way things stand, Miles may be right. Signs of mortgage rationing are already evident.
But net new lending last year was £108bn, so if he is right we’re talking about two-thirds of annual net lending. That would be catastrophic and lenders would desperately bid up funds to even higher levels than now.
Losses in the financial industry are already horrendous and all players are being careful who they lend to.
Since the beginning of this year, lenders have been closing their businesses, culling parts of them or reducing their LTVs. Virtually all lenders have tightened their lending criteria to some degree.
Meanwhile, rapid changes in product criteria and deals being pulled with little notice have become commonplace, giving brokers little time to secure products for clients.
So things are getting worse in the mortgage market and it is likely to be some months more before the situation improves.
I’m optimistic about the market making a recovery in the second half of the year and hopeful of it moving ahead after that time, but I’m not holding my breath.
The Mortgage Practitioner