CML comment on Bank rate cut announcement
Published: 4 August 2016
Commenting on today’s MPC announcement of a cut in Bank rate, Council of Mortgage Lenders director general Paul Smee said:
Since the last change in official rate in March 2009, the average mortgage rate has already fallen from 3.8% to 2.9%. This confirms that Bank rate is not the only influence on mortgage pricing; we feel that the mortgage market is at present well capitalised, resilient and open for business. Housing market fundamentals are sound. So, we see today’s cut as a wider reaction to the economic effects of recent political uncertainty.
We note the announcement of the Term Funding Scheme and its potential positive impact on lenders' businesses. We will work with the authorities on the detail.
With the cut to rates:
- This brings to an end the longest period of no change in rates since the War/post-War years of 1937-51. Bank rate was cut from 1% to 0.5% in March 2009, and has remained there since.
- However, mortgage rates have fallen significantly over that period. The average mortgage rate over that period has fallen from 3.8% to 2.9%.
- This is because Bank rate is not the only influence on rates. Funding costs, levels of competition, targeted levels of profitability, and an assessment of current and future market conditions to price appropriately for risk are also relevant factors.
- So it also follows that a rate cut does not automatically feed through on a like-for-like basis to mortgage rates. Future pricing will depend on all the factors above and is a matter for individual lenders.
- Around 50% of borrowers are currently on fixed rates and will therefore see no immediate impact on their payments in any case. Of the remaining 4.9 million home-owners - the majority of whom have a variable-rate mortgage - over 1.5 million (perhaps as many as 1.8 million) have a tracker rate mortgage - these borrowers may automatically see a rate reduction depending on their mortgage contract (but some will have a "collar" or lower floor below which rates cannot fall).
- For new borrowers, mortgage pricing is extremely competitive and set to remain so. However, it is worth noting that the Bank has also been urging borrowers to plan ahead for the prospect of higher rates in the future - don't assume that just because rates are low now, they will necessarily stay that way for a prolonged period.
- Recently, fixed rates have been accounting for about 90% of new lending, and while this is partly because they have been priced attractively, it's also likely to reflect a consumer appetite for certainty about outgoings.
- Some hesitation on the part of consumers thinking about buying property is understandable against the backdrop of recent political uncertainty. However, mortgage lenders are well capitalised and resilient and open for business to lend, in line with consumer demand as and when confidence levels bounce back.
Notes to editors
1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 97% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion.
2. We have published a more in-depth News & Views article today, putting the rate change in more context. Read the full article First Bank rate cut in seven years - so, what happens now? on the CML website.
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