Base Rate will fall further but what will mortgage rates do? - 10.11.2008

Author: Steve Olejnik Posted on: 06 November 2008

Looking at where SWAP rates are heading, it is clear that the market expects the Bank of England Base Rate to continue to fall. RBS are predicting rates to fall towards 2% "sooner rather than later" and many are calling it even lower with a few predicting a drop to 0%! Rates are already at their lowest since the 1950s and with the UK economy shrinking by 0.5% in Q3 and evidence that the slowdown is accelerating, it is no surprise that rates will continue to fall.

So what does this mean for mortgage rates. Already today we have seen the majority of lenders withdraw tracker products following the Base Rate reduction and it is widely expected that these will be replaced with higher margin products or indeed will not be replaced at all in the short term. As mentioned in previous blogs, the key indicator is the 3m LIBOR rate which has fallen by c70 basis points over the last month but has some way to go. With today's reduction, the gap between Bank Rate and 3m LIBOR is c250 basis points (compared to 10 - 15bps differential that we are historically used to) and whilst today's action should have some effect on reducing the gap, only when banks are confidently lending to each other again and pressures on funding are lifted, we will see a return of competitive tracker products.

The silver lining in all this is with SWAP rates continuing to fall, we should see an improvement in the fixed rates over the coming weeks and as and when we see 3 and 5 year Fixed Rates starting with a "4" it may be the time to fix and have certainty in monthly payments rather than hold on and wait for an attractive Base Rate Tracker which may not materialise for some time.