Whether or not interest rates will fall further before the end of the year, there is no guarantee that this will benefit mortgage borrowers directly, because what the Bank of England does is currently less relevant than what high street banks think.

The Credit Crunch started in the US, as the result of over-exuberant lending (a polite way of saying that the greed of American bankers is the root cause) but there is no doubt that the UK banking and corporate investment community also shares part of the blame for buying up packages of ‘securitised’ mortgages without having any understanding of the level of debt involved.

If the US bankers thought they were being clever by off-loading the high-risk mortgages round the world, they have certainly now discovered the old adage (common within the insurance company market) that you do not load up rubbish on your counter-parties or they will stop dealing with you.

Well as soon as people who should never have been lent money in the first place started to have problems repaying their debts – and house prices started to fall as re-possessions flooded the market – the chickens came home to roost; with a vengeance.

All of a sudden, banks and other investors were unwilling to ‘buy’ mortgages from each other because they were uncertain about the value of the security offered by properties involved. As an immediate corollary of this, banks started also to consider whether their competitors were actually financially sound any more; if not, there is no point in lending to them except on more expensive terms.

And this is where the problems began for borrowers, whether home-buyers or those wishing to finance businesses.

Although the Bank of England is the lender of last resort – as some banks have recently rediscovered – most of the transactions that keep money markets afloat are actually between the high street banks themselves. They work through a system called the London Inter Bank Offer Rate, which determines the rate that each will charge the other for lending between them. Historically, this has been close to bank rate, but over the past year, the rate at which banks will lend to each other over a year has risen dramatically compared with base rate.

Unfortunately, this means that mortgages are unlikely to come down very much, even if the Bank of England’s Monetary Policy Committee cuts base rate dramatically. There may be some impact on mortgages, but this is likely to come more from the sentiment behind any such cut. In other words, if bankers believe that the government is determined to help them, they may relax the rate at which they lend to each other.

But beware, they have lost a lot of money over the past year and will want to recoup it by maximising the rates at which they lend, compared with those at which they borrow.

How to defend yourself
Whatever happens to mortgage rates, borrowers should consider reducing their outstanding balance by overpaying their monthly amount (unless they have the older type of mortgage under which repayments are only credited once a year, in which case they should identify and work towards that date). This will help reduce your loan-to-value ratio, should you wish (or need) to move your mortgage.

Everyone should ensure that they do not miss any repayments, or if this is inevitable, that they tell the lender in advance and say how long this might last and how they will get ‘back on track’. Otherwise their credit history will be affected.

If you have to move your mortgage, make sure that your credit history is clean first (you can check with Experon or similar services), that you are on the electoral roll and that you do not approach more than one or two lenders (both can affect your credit score).

It is best to seek professional advice first as you will then be able to limit the time you spend on the exercise and can expect to get the best deal appropriate to your needs.

As ever, it is important to take individual advice before making any decision regarding your finances. For further information, please contact Robert Bruce Associates.
Your home may be repossessed if you do not keep up your mortgage repayments.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.