Property Investment Blog by Stuart Law

Finally Mervyn and the MPC woke up - The Base Rate cut was savage as we said

6 November 2008

No surprise there then - at least not to regular blog readers ( investors.assetz.co.uk/blog/archives.php ) - base rates down 1.5% to 3%, the lowest for 53 years.

Mervyn King and the MPC have finally woken up to the economy slowing down being a higher risk than a temporary surge in inflation. We have been saying this for a year and for the last few weeks have been giving advance warning on imminent 'savage' base rate cuts. Do you know what is sad, and rather worrying ? 60 out of 60 Bloomberg economists failed to predict the large cut - in fact all but 8 said a 0.5% cut was a certainty and those 8 said the cut would be 1%. The MPC would have to have been mad not to react the latest economic data after a year of dithering so why did these 60 economists get it wrong - are they not paying attention ? Are they asleep to to what is going on in the real economy and the effect that bank interest rates have on the man in the street and the small business? I think so.

Some of our clients' mortgages, and mine, are now two point something percent, many if not most others are three point something percent - you guessed it, I and many clients are on trackers at present and most of them lifetime trackers until such time as fixed rates bottom and we exercise the free switch most of them come with. I practised what I preached and since September last year trackers have been the only place to be.

Are there further drops in base rates to come ? Yes, we think that rates will keep falling to between 2% and 2.5% before Christmas and could hit 0% by the middle of next year - not very likely but certainly possible.

Does this help everyone on trackers? Probably not as many BTL rates have a 2.75% floor below which rate cuts will not be passed on. Didn't know that ? No, many didn't and they certainly were not told so watch for a class action against the banks for misselling next year if they don't do the right thing and strike out the small print in many tracker mortgage terms.

What about SVR, Standard Variable Rates? If you have not been able to move to a new lender because you don't have the equity or rental level then you may well be stuck on a SVR mortgage after the expiry of your tracker or fixed rate. Will base rate cuts be passed on to you ? Not all have been so far and not all will be going forwards but such savage cuts will cut your rate a lot even if the full amount isn't passed on.

The Government £50bn bank investment had a condition that banks help borrowers - Alistair Darling has repeatedly stated that banks must pass on all rate cuts but their new part owned banks are not playing ball and really don't want to do it. Banks are profiteering regardless of the CML saying otherwise in their rather silly statement today. Banks have been raising margins on their mortgages for many months and they are still doing it this week. They need to make bigger profits to repair their balance sheets but charging their customers instead of their shareholders will not be forgotten.

What does this mortgage drop mean to the prospects for the economy ? There are many factors in play and there are many problems to address, not least the trust in banks by fellow banks and credit starting to grow again but the real economy and consumer sentiment will be dramatically buoyed by this cut and the further ones to come.

There is now a good chance of a V shaped bounce rather than a long U shaped slump in the economy but many more things need to be done to get there. Times are good though for property investors - rents are surprisingly stable in the face of developers dumping unsold stock on the rental market and mortgage rates dropping for many will be making Buy to Let quite profitable for most.

And yes, Mervyn should still resign for leaving it a whole year before he remembered there was a real economy out there that is more important than the square mile.

General Property Investment News ·UK Buy to Let and Commercial Property ·

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