INTEREST RATES TO STAY LOW FOR YEARS
News Article Date: Monday 12th of October 2009
The official cost of borrowing will stay at just 0.5 per cent until at least 2011.
It will remain below two per cent until 2014 as the Bank of England tries to revive the economy, according to a study by the respected Centre for Economics and Business Research.
Home owners and buyers could reap the benefits of cheaper deals as banks and building societies compete for customers by lowering their mortgage rates.
In the past week, Northern Rock, Barclays and HSBC have fought to secure the top spot in mortgage Best Buy tables. Last Thursday, Spanish-owned Abbey and Alliance & Leicester entered the fray with a host of new deals.
Economists believe that a long- term low base rate will tempt many mortgage providers to slash costs further.
But the Centre’s forecast will bring no joy to savers as the low level of interest rates will offer a poor return on their funds. However, it is expected to boost both the housing and stock markets while sterling is likely to remain weak, meaning good news for exporters.
Darren Cook, of financial website MoneyFacts, forecast a full-blown mortgage price war if lenders untie their purse strings and start to compete with each other again.
“If 10 to 15 banks and building societies come to the party and put better deals on the table, that would be good news for owners, buyers and the property market in general,” he said.
“If lenders thought the Bank of England rate was going to stay low for an extended period of time there could be a rush to take advantage of the stability and rates cut.
“We need to see more lenders offering deals under two per cent, especially those who want to see the return of re-mortgagers. That market is almost at a standstill as people transfer to their lender’s Standard Variable Rate and stay there because it’s not worth their while remortgaging.”
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Lenders have been criticised for refusing to drop interest rates. Since the credit crunch began two years ago they have tightened lending criteria and only offered the cheapest deals to buyers with 40 per cent deposits.
Despite the low base rate and further falls in the price of money borrowed by the banks and building societies, home loan deals were unchanged in September as the mortgage market continued to suffer from a lack of competition.
However, the average cost of a two-year fixed-rate mortgage rose by 0.03 to 4.46 per cent, its highest level since last December.
Nicholas Leeming, director of propertyfinder.com, said: “Money market interest rates have fallen a long way and are now closely in line with the base rate. That means lenders can borrow at close to 0.5 per cent but will only lend to families struggling to buy a home or remortgage at rates around 10 times that level. The banks then pocket the difference.
“The whole point of low base rates is to encourage lending and borrowing but instead banks, awash with taxpayers’ cash, are using them as an excuse to feather their own nests.
“The economic recovery is likely to be slow and patchy, especially given the mountain of government debt that must be repaid. Letting people borrow at fair interest rates can help speed the return to growth to the benefit of everyone.”
The Centre for Economics and Business Research predicts the Bank of England will pump another £75billion into the economy.
However, it says whoever wins the next general election will have to raise £100billion in tax rises and spending cuts to deal with Britain’s deficit.
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