Interest Rate Predictions Tristan on 26 Mar 2009 08:07 am
Why Current Mortgage Interest Rates Don’t Reflect The Base Rate
I hear on a regular basis about how the economy is ruined and how everything is going wrong, with house prices falling rapidly and lenders only approving 10% of the mortgages in Jan 2009 as they did in January 2008, so it would be natural of me to assume that house prices would be very low currently. Wrong, I looked at house prices near me recently and they are still very expensive.
I then decided to look into the cost of mortgages, by looking at some comparison websites and I was staggered to find that even though the Bank of England base rate is at an all time low of 0.5%, you could not borrow money for less than 4%, and this is despite the fact that the UK government now owns a controlling interest in most of the high street lenders, and has lent money to the rest!
You would think that if the government of this country knew what they were doing, they would have insisted that before they lent money to or bought into the failed UK banks, they would have got some cast iron contracts in place to ensure that the monetary policy the Bank of England is pursuing would be translated both in terms of existing tracker or variable rate mortgages, but also new lending.
It seems they didn’t, and as such the UK taxpayer has simply been taken for a ride by the banks who are now sucking up this “aid” money from the UK government and doing nothing with it other than increasing their capital reserves. The whole point of the government stepping in was to ensure that a, the banks didn’t fail, and b, that they started lending money to people (and not just the AAA rated people that didn’t really need to borrow money, everyone), and c, that they started lending money at sensible rates of interest.
So why has this not happened? I can only assume that as with Sir Fred Goodwin of RBS, the government have been taken for a ride - when will they learn not to trust city bankers?
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on 27 Mar 2009 at 8:46 pm 1.cornish dragon said …
Tris it is very unfair to criticize the poor old bankers !
For the first time in 18 years they are doing their jobs correctly…..
Implementing a strict minimum deposit of 10% for people with good credit and much more for people with form….
No more than 3 x salary…. may be 3.5x with two reasonable earners. If as you say 90% of mortgages
are being refused then this absolutely right.
Cutting out all speculative or potentially risky loans without excellent security.
Reducing o/d’s to businesses that should not have been given them in the first place.
Decreasing their ludicrously high fiat ratios and attempting to rebuild deposit …
And getting the stupid tax payer to buy their past mistakes helps no end ;)
Attempting to bring their bond and share holders a
profit which is after all their job!
4% is ridiculously cheap borrowing…18% in Iceland. It should be a minimum of 10% in the UK ……IMHO and low it will come to pass !
( I paid 15% on bank business loans in the past )
0.5% is just a politically inspired joke……..
You are quite right domestic property is far too expensive… it needs ANOTHER 40% hair cut. More as
wage deflation engulfs the country. Only at 3 times
salary plus 10% does it find equilibrium..
http://www.patrick.net/housing/crash.html?ref=thanks_layoff_daily
Keep smiling…
Austrian Dragon
on 28 Mar 2009 at 9:12 am 2.Tristan said …
Hey Brodie
I know that 4% is still pretty cheap for money but it’s the fact that the govt has tried to get the economy going by pumping all this money into the banks and the rates for new money have hardly dropped since the base rate was at 5% - a year ago!
I quite agree with you that house prices still need to drop a considerable amount, maybe not 40%, but at least 25%.
I was looking at a 2 bedroom, fairly small house in Wells the other day, asking price of £150,000. This property really should be below the stamp duty threshold, somewhere like £120k - £125k.
If I had to raise a 10% deposit (which is fairly prudent), I could save up that money in a year, whereas trying to save up a 20% deposit (what the banks are currently asking for) of £150k is £30,000, which would take me best part of three years!