Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

UK Base rates cut (again) – another record

Posted by markharrison on February 5, 2009

In sport, it’s common for records to fall at each Olympics.

In banking UK history, it appears that no-one is willing to wait four years to smash a record, but that the Bank of England want to set a new “lowest ever” on a monthly basis.

In a move that was, frankly, anticipated by just about everyone, the MPC again reduced the UK base rate, from 1.5% to 1.0%.

Customers on tracker mortgages will see the benefits, as will (according to the FT) customers of the standard rates of Nationwide, Halifax, Lloyds TSB, Woolwich and Skipton Building Society. This is, on the face of it, good news for borrowers… sort of…

Specifically, it’s good news for borrowers who have already got mortgages, but not altogether great for those looking for mortgages.

The problem is that, as a result of the rate cuts, over 14% of UK savings accounts are now paying 0.1% interest a year – that’s to say 10p interest for every hundred pounds in savings. Under these circumstances, people are saving less (despite the offset in savings growth caused by “I might lose my job” fear.)

When people save less, banks have less money to lend. It’s nothing like as simple as “one pound in savings means an extra pound to lend”, but there is a relationship – in that regulators only allow banks to lend a certain multiple of the cash they have.

However, banks are caught in a double-whammy: One the one hand, people are saving less (because they can only get tiny interest on their savings)… but on the other hand the regulators are requiring banks to hold MORE cash per million of lending than they were a couple of years ago… so even if savings returned, the money available to lend wouldn’t come back to the same level.

So, harder to get a mortgage – in that you probably need a much bigger deposit. Truth be told, finance was much too easy to come by in the past – some made a killing by borrowing to buy in a booming market and got out in time before the crash… others, however, borrowed too much because the banks were falling over themselves to lend money… and then got stuck with property encumbered with massive mortgages in a falling market. Those who concentrated on positive cash-flow over the last few years (as I’ve been banging on about since 2004) seem to be OK, but those who bought anything in the belief that “properties go up in value” or with the intention to “flip” them have been left holding the bag when the music stops.

My own position is that I’m waiting, but not yet buying again. I see the potential for bargains getting better each month, as credit (slowly, very slowly) improves, prices continue to fall, but rents (round here, at least) are holding up.

5 Responses to “UK Base rates cut (again) – another record”

  1. HIP said

    Great news for those with tracker mortgages. My decision to take a tracker mortgage was probably more luck than good judgement but hey everyone needs a bit of luck.

    There does seem to be many taking a similar opinion ie waiting for the time being. Buying at the bottom and selling at the top would be great but how many do actually achieve this?

    However, as a long term proposal now is not such a bad time to buy if you can secure a good mortgage deal.

  2. Just for the record, I don’t expect to be able to “time the bottom”…

    … but if a property of type X (and yes, I know about non-fungibility as well… but bear with me) is at £160k now, and might bottom at £150k, I’d rather but at £160k when it’s on the way back up, rather than when it’s still going down.

    The thing that could trip up my approach is if the bottoming-out is fast, and things start going up quickly. But I’m effectively saying that I’d rather take THAT risk than the risk of things bottoming out lower than expected.

    Loan to Value across the entire portfolio (marked to market, as it were) is important to me🙂

  3. florida01 said

    Great post, very interesting concept. You make a good point that all the factors need to come into play. Selecting a good property agent is most important for property management who helps you throughout the buying process and beyond to completion.

    Property in Florida

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  5. Karess said

    Imvsprsiee brain power at work! Great answer!

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