Halfway house for the financial crisis as lenders cut rates


Although it feels as though the financial crisis has dragged on forever, the bad news is that we are not even halfway through it. So says Mervyn King, governor of the Bank of England, who has told the Treasury Select Committee that he does not expect the economy to recover until 2017.

The continuing problems in the Eurozone are behind his gloomy outlook, as Cyprus becomes the fifth Eurozone country to seek financial assistance. Spain has also had 28 of its banks downgraded by Moody’s Investors Service, including Santander, hot on the heels of the downgrades of Barclays, HSBC, RBS and Lloyds Banking Group last week. Meanwhile, official data shows that the government borrowed more than expected in May – nearly £18 billion compared with just over £15bn in May last year.

So what does this continuing turmoil mean for mortgages? If there is any good news, it is that the downgrades were expected so the money markets have already factored them in.

With Swap rates – the rate lenders pay to borrow from each other – falling significantly in the past couple of weeks, lenders should have some leeway to reduce margins. Indeed, several have reduced their fixed rates recently and we expect more to follow.

More money should also be available for mortgages via the Bank’s funding for lending scheme although it is not yet clear whether there will be a significant increase in mortgages available to those with modest deposits or whether lenders will continue to favour those with sizeable down payments. For this money to make a real difference to the mortgage market, lenders will have to do more lending to those with small-ish deposits.

Adrian Anderson
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Adrian Anderson