Base rate cut could threaten smaller lenders

Over recent weeks, speculation has grown that the Bank of England could further reduce the UK Base rate. Despite already being at a record low, many economists have predicted that the Bank’s Monetary Policy Committee could choose to cut the rate by 25 basis points in the run up to Christmas or early in the New Year, reducing the cost of many large mortgages. However, an expert has warned that such a cut could damage competition in the mortgage market by threatening smaller mutual lenders. Keep reading to find out why a Base rate cut may be bad for the UK’s high value mortgage market. Base rate cut could actually harm the mortgage market Over recent months, many economists have predicted that the Bank of England could cut the Base rate before the end of 2012. Capital Economics has long been predicting a rate cut in November and a reduction in the Base rate to 0.25 per cent would represent the lowest lending rate in the 318 year history of the Bank. However, the chief economist of the Nationwide building society believes that any further cuts are likely to generate extremely small positive results. Robert Gardner from the UK’s largest mutual lender told Mortgage Strategy that the positives are not large at all. He believes that even if the Bank of England cut the base rate by 50bps, the most it is likely to deliver to growth is half a percentage point next year and in the subsequent years. Only around 35 per cent of mortgages are on trackers so the actual boost in terms of reducing debt servicing costs in the household and corporate sectors are likely to be very small, closer to 20bps on GDP growth. It would deliver very little at all, even just looking at the positives and without considering the negatives. Islay Robinson from Enness Private Clients, the London mortgage broker is in agreement with this and has observed that while the number of borrowers in the UK with mortgages contractually linked to the Base rate has increased in the last three years, there’s no compelling evidence that a 25 basis points cut would help the economy. The Nationwide economist also believes that a cut to the Base rate – which has remained at 0.5 per cent since March 2009 – could hurt some of the UK’s smaller lenders by putting significant pressure on lenders and interest margins. The Bank of England recognises cuts could reduce the availability of credit to the wider economy and it says this could have a particularly negative effect on some smaller building societies who are particularly vulnerable, reducing competition in the marketplace. Both Mr Gardner and Mr Robinson, a large mortgage specialist from Enness Private Clients, believe it is more likely that the Base rate will remain at its current level of 0.5 per cent for several years. Mr Gardner added: “We don’t think there is a strong case for reducing the base rate any further and it is likely to be counterproductive. But, we also don’t expect the rate to rise until early 2015.”