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News - 13 June 2013

Mortgage rates to fall to 1.5pc for the first time

Mortgage rates could fall below 1.5pc when a rush of new lenders arrives on the market in the coming months.

The combination of new lenders, a renewed appetite to lend among the incumbent banks and cheap funding from the Bank of England could see rates fall by up to 0.2 of a percentage point, according to Ian Gordon, a banking analyst at Investec - the broker.

A fall of a fifth of a percentage point is equivalent to monthly repayments falling by £50 or £600 a year on an interest-only basis or by £30 on a repayment loan, assuming you borrowed £300,000.

The new lenders are likely to be attracted into the market by the availability of cheap loans from the Bank of England, among other things and they will be in a better position to pass on those low rates to borrowers than existing players, experts said.

Home & Savings Bank and NBNK, which was in the running to buy 630 Lloyds branches, are among the new lenders expected to enter the market this year, according to industry sources. Another, understood to be a household name, is expected to launch this summer.

Tonmoy Kumar, Manager of the Accounts Department of ABDS comments:
“Under the Bank’s Funding for Lending Scheme (FLS), banks and building societies can borrow at rates as low as 0.75pc. But the amount they can borrow is pegged to the amount they lend on to households and businesses. The key point is that the Bank looks at “net” lending rather than the “gross” figure.”

Net lending takes account of loan repayments so when borrowers pay back their mortgages, for example, that money is subtracted from the “gross” amount that the bank has lent.
Established lenders have loans maturing all the time, so the net figure is normally much less than the gross one. But a new mortgage lender will have very low repayments, so net lending and gross lending will be almost equal in the early days.

As a result, a new player would be able to fund almost all of its lending by cheap loans from the Bank of England, but an existing lender cannot do the same.

Older home owners who are interested in releasing cash from the equity in their home have also been offered hope of lower interest rates following signs that some big mortgage lenders are preparing to enter the equity release market.

For business advice and a more personal approach, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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