September 5, 2008 | posted by Pam Atherton in Banking, Mortgages, Savings |

The Bank of England’s decision to keep base rate on hold at 5 per cent was no surprise to anyone.

Caught between a rock and a hard place, the BoE had to balance the need to contain inflation with the clamour from businesses and consumers for lower rates to boost the economy and rekindle the mortgage market.
On the one hand, the recent sharp fall in the oil price increases the chance of the next move being downwards, on the other,  inflation will probably increase for another couple of months before peaking at around 5 per cent.

But despite rates being held, mortgage rates are falling. Swap rates (the rate at which banks lend to each other for a year or longer) have continued to decline over the last month, as expectations of the scale and speed of Bank of England  base rate cuts have increased. 

Ray Boulger of mortage brokers, John Charcol, says: “Two year swaps are over 1.2 per cent down from their June peak of 5.28 per cent. 

“As a result, lenders have continued to cut the cost of fixed rate mortgages, with the cuts now also being extended to 90 per cent  loan-to-value (LTV) mortgages as well as more aggressive cuts for rates on  up to 75 per cent LTV loans. 

“A modest fall in the 3 month Libor rate, to 5.74 per cent, coupled with an increased level of competition in the market, has even resulted in some lenders cutting the margin charged over base rate on some of their tracker mortgages.”

Boulger says that even though base rate is expected to fall significantly over the next year, it is still too soon to buy a fixed rate mortgage and continues to recommend trackers. 

However, for those borrowers who want, or need, the security of a fixed rate, the good news is that the best fixed rates have now fallen to a similar level to the initial rates charged on the best trackers, and in some cases even a little lower.

Meanwhile, savings rates continue to be extremely competitive with many banks and building societies paying 1.5 per cent or more over the 5 per cent base rate.

For instance, Icelandic Bank Kauphting Edge continues to offer savers a rate guarantee of at least 0.3 per cent above base rate until 2012, and is currently paying 6.55 per cent gross AER on its instant access account and 6.97 per cent AER on its 6 month term account.

But Defaqto banking principal, David Black warns: “Longer term fixed rates are reducing and a handful of banks have reduced their variable savings rates recently.”

For more on mortgages rates, visit Defaqto’s unique mortgage search tool:
http://www.defaqto.com/consumer/mortgages.aspx

For more on instant access savings rates:
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx

For more on term account rates:
http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx