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- guardian.co.uk, Friday November 7 2008 18.30 GMT
Don't be fooled: mortgage lenders can only cut their rates so far without ruining the investors and savers we all depend on
Homeowners are kidding themselves if they believe the banks are about to provide a bonanza of cheap mortgage deals on the back of lower base rates. Banks are not bust one minute and fountains of cheap money the next. It couldn't, and shouldn't, work like that.
Some newspapers may hope to trigger campaigns for mortgage rates. Commentators like the former Goldman Sachs partner and Blair adviser Gavyn Davies can argue it should happen. And the cuts in lenders' standard variable interest rates lower would give the appearance of a victory. But there are several reasons why it isn't quite the slam dunk it seems.
No one buys an SVR mortgage. For the last decade, we have all bought mortgage "deals" – fixes, discounts and trackers. They have all been priced lower than SVRs. That is now history. All the trackers have disappeared from the banks shelves,and the price of a discount or fix means you are effectively buying the SVR, or near as damn it. It means the price of a mortgage in the bright new tomorrow will be only a little lower than the price yesterday.
Are the banks refusing to pass on the cuts because they are evil money-making monsters? Maybe they were last year. Now, they are talking about survival. To that end, the regulator also wants them to put their fragile finances before any thought of cutting mortgage rates.
The Financial Services Authority has ordered banks to put more money aside to help them ride out a recession and any deterioration in the credit markets. It is difficult to see how lending can grow in the short term when this is key message from the FSA.
Even lower rates for remortgaging are difficult to implement when that, in turn, means cutting savings rates. Banks need savers' funds to shore up their capital position. They are only supposed to lend from a safe and secure savings base, not using dodgy wholesale funds sourced from the international money markets. Savers will desert the banks and put their cash elsewhere if their rates fall steeply.
Investors are another barrier to cheaper rates. They want their banks to increase profit margins. If banks can increase the spread between mortgage lending and paying savings interest, then they can recover more quickly. At the height of the boom, mortgage rates were little more than 0.5% above savings rates. Today, banks want that figure to expand to 2%. If mortgage rates track down with further cuts in the base rate to 1%, which some commentators believe will happen next year, it will be difficult keeping the savings rates above 2%.
Like them or loathe them, investors will vote with their feet if they see the government pushing banks to open the lending floodgates. They will sell their shares and, as Edward Harrison observes, that could trigger another Northern Rock-style run.
Of course, if the surpluses are paid in bonuses to executives and dividends to investors, then we have the right to object. But if they put the banks in a position to repay our £37bn loan, then that should be applauded.
Kicking banks to loosen business lending is a separate argument. Businesses, especially the smaller ones, have faced sharp and often business-busting rises in rates. The banks have strangled companies with interest on loans of 15% or more, restrictions on overdrafts and demands for loans to be repaid in days or weeks. When Peter Mandelson meets bank representatives later this month, he should demand a return to 2007 practices as the price of the bail out.
source: guardian
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Rory Vanucchi
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