Bank of England Reduces Bank Rate by 0.25 Percentage Points to 5.5%

News Release

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.

Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.

London house prices fall 0.6% in October

According to the Land Registry’s latest house price index, London house prices have fallen, compared with a relatively flat market in England and Wales. October’s Land Registry House Price Index showed house prices in London fell by 0.6%, following a 1.3% gain in September, while the overall English and Welsh market demonstrated a slight increase of 0.1%, well below the 0.7% average monthly increase recorded over the last 12 months. The average house price for England and Wales is now £184,346, while in London the figure stands at £351,039. At the same time, annual house price inflation also eased during October, dropping to 8.1% down from 8.7% in September.

A third of mortgage holders could be in trouble

A study by consumer research group Mintel has shown that up to one in three, or 5.5 million mortgage holders in Britain could face serious financial difficulties as a result of the US sub prime crisis, and the tougher lending climate it has created. “The focus over the last few months has very much been on sub prime borrowers, but they are only the tip of the iceberg,” said Toby Clark, a senior finance analyst at Mintel. The group claims that 9% of British mortgage holders were classed as sub prime, while a further 24% were non-standard and relatively high risk because they had irregular incomes.”In today’s more conservative lending climate, the unconventional financial situation of these homeowners means that they will now face higher repayments and increased lenders’ fees when remortgaging or moving house,” Mintel said.

Two thirds go to friends and family for advice

Two-thirds of people in Britain are using their friends and family to recommend financial advisers, claims Birmingham Midshires. According to its research, when seeking advice with finance, 63% use personal recommendations, 44% look for Government regulation and 38% go by the years of experience the adviser has. Tim Hague, managing director of mortgages at Birmingham Midshires, claimed that using an independent financial adviser is vital to navigate through the hundreds of products on the market. “While it is good to get a steer from friends or family on where to go for financial advice, their financial needs may have been very different,” he explained. According to Mr Hague, seeking a specialist IFA will be beneficial for a consumer as they are more qualified to meet their exact needs.

Mortgage arrangement fees double in two years

Latest Moneyfacts research has revealed that the average mortgage arrangement fee has almost doubled during the last two years. Figures from November 2005 showed an average flat arrangement fee at £441. Today it stands at £827, with a massive 9% of prime deals now charging a percentage fee. “Thousands of borrowers coming off a two year fixed rate will be bracing themselves for higher interest charges, with the best deals over 1% higher than in 2005. But they will also need to prepare themselves to pay much higher fees, with the average fee rising 100%.” The use of percentage fees has become more common, with 9% of all prime mortgage deals charging a percentage fee ranging between 0.2% and 3.5%. “Unfortunately too many borrowers still focus their initial attention on getting the best rate, without taking full consideration of the true cost of the deal,”

JC Flowers tries to derail Virgin bid for Rock

JC Flowers tries to derail Virgin bid for Rock

JC Flowers, the US private equity firm, made a last-ditch bid yesterday to wreck Sir Richard Branson’s takeover of Northern Rock after it signalled possible increased payouts for shareholders as part of a revised offer. The move is likely to heighten tensions between the three main bidders for the bank and the Treasury, which is thought to be keen on a quick sale to close the door on the politically and financially embarrassing episode. Sources close to Flowers said attempts to sit down with Treasury officials this week had proved fruitless, despite promises from the government that all takeover proposals would be examined. The Treasury denied last night that it was reluctant to engage in talks with the Flowers team. “We stand ready to have discussions with any bidder that meets the principles we set out,” it said. Flowers, which was founded by the former Goldman Sachs partner Chris Flowers, has threatened to walk away from the deal unless ministers get back around the negotiating table within the next few days.
[The Guardian page 42 - 1.12.07.]

Bank deputy hints at interest rate cut

Interest rates could be cut next month to counter the turmoil affecting markets, a Bank of England official said yesterday. Deputy Governor Rachel Lomax said she feared the financial crisis could trigger a fall in property prices. Despite voting for rates to remain at 5.75 per cent earlier this month, she said she would be willing to cut rates to combat the “credit crunch” caused by the collapse of the American mortgage market. Banks have been “hoarding” money rather than lending because they face major losses on portfolios of defaulting US mortgages, she said.
[Daily Mail page 8 - 23.11.07. Also reported in The Daily Telegraph page B5.]

HIPs get full roll-out

The controversial Home Information Pack (HIP) scheme is set to be rolled out for all properties across England and Wales from 14 December, the Government has announced. Housing minister Yvette Cooper said: “HIPs and EPCs are already helping consumers to save hundreds of pounds off their fuel bills and are cutting search costs too. All home buyers will be able to benefit from energy efficiency advice, with those receiving low green ratings of F and G especially targeted for support and grants to make improvements to cut their costs and carbon emissions.” Jeff Smith, chief executive of HIP Payment Services said: “Today’s announcement will be greeted with much enthusiasm and relief from the industry, which has been tirelessly campaigning for HIPs to be fully extended across the whole market since their extension to three bedroom homes back in September. With HIPs fully rolled out across the market, they will finally be able to bring about the many benefits they were initially designed to achieve; a faster, more transparent process which will aid a more informed buying decision.”

Price hopes scaled back as house sales slow

Price hopes scaled back as house sales slow

People struggling to sell their houses are offering more discounts and some are turning to auction houses in hopes of a quicker sale as a slowing property market forces them to scale back price expectations. Asking prices have been cut on 10 per cent of properties on the market in November, whereas just 5.8 per cent of stock had been discounted in the same month last year, according to a Lehmans analysis of data from the Spicerhaart group of estate agents. Results from recent auctions - where sellers are usually keen to strike a deal fast - suggest more properties are remaining unsold after failing to reach their reserve prices in the sale room, while some auction houses are reporting an influx of new customers who have failed to sell their property through estate agents. “The auction results that we have been tracking suggest that a substantial gap has opened up between the price that buyers are willing to pay and that which sellers are expecting to achieve,” said Alan Castle, economist at Lehmans.

Rental income at record high

Rental income at record high

Strong tenant demand for rented accommodation has pushed the average rental income generated by landlords to a record high, according to Paragon Mortgages’ October Buy-to-Let Index. Average rents hit £11,066 during the month, 10.2% higher than a year ago. Yields have continued to remain steady at 6%, while total annual returns on a property purchased 12 months ago averaged 15.5%, up from 14.2% in September. John Heron, Paragon’s director of mortgages, says: “Much of the recent negative media comment on the buy-to-let sector has confused genuine well-researched buy-to-let investment with property speculation. There is solid and growing demand for decent, affordable rented homes in all parts of the country, but it is essential landlords purchase the type of property that meets tenants’ needs and expectations.”

Two thirds of sub prime deals gone in six months

Two thirds of sub prime deals gone in six months
According to new research by Moneyfacts, two thirds of non-conforming products have been pulled from the market within the last six months. Julia Harris, mortgage analyst at Moneyfacts said: “Just over six weeks ago Moneyfacts’ research revealed a 40 per cent overall drop in the number of residential and buy-to-let products available since the market peaked in July. Since then, the prime markets have shown signs of recovery, with increased activity from providers and signs of innovation returning. However, since our last report in October, a further 20 per cent of sub prime residential products have been withdrawn and a staggering further 62 per cent of sub prime buy-to-let deals have disappeared, taking the overall total reductions since July to 63 per cent and 89 per cent respectively.”

House prices too high for graduates

More than half of graduates from the past 10 years have not been able to buy their own home. Just 44 per cent of them are on the property ladder, according to research published yesterday by Scottish Widows bank. Seven out of 10 graduates who have not yet bought a property said prices were the biggest barrier. The average graduate also owes £10,586 in unsecured loans and on credit cards. Among those who have bought their own place, 72 per cent had to take out a joint mortgage with a partner, friend or relative. But 69 per cent admitted they would be unable to afford to buy out the other person if the arrangement turned sour.
[The Daily Telegraph page 12 - 23.11.07.]

Kensington pulls out of sub prime

Kensington pulls out of sub prime

In a response to the continuing financial turmoil caused by the credit crunch, Kensington Mortgages has pulled its entire sub prime mortgage proposition. Intermediaries will have until the end of today, Friday 23 November, to submit cases for any of the lender’s adverse products. Ian Giles, director of marketing at Kensington, said: “There has definitely been a further tightening of funding in the last week or two. There is just no current appetite from investors for adverse credit portfolios.” Mr Giles said that Kensington would now focus its attention on its prime business as there was still funding available for whole loan sales of prime assets.

Credit crunch hits high street as sales fall

Credit crunch hits high street as sales fall

There were signs that the credit crunch has hit the high street as figures showed yesterday that retail sales fell in October for the first time in nine months. The high street has so far escaped almost unscathed from the turmoil that has caused people’s loans, mortgages and credit cards to cost more. But figures from the Office for National Statistics showed that shops were starting to feel the pain for the first time, with sales volumes falling 0.1 per cent, despite a fourth successive month of discounting from retailers. Analysts had been predicting a modest rise as shoppers - encouraged by the cold snap - start to look for winter coats, boots and early Christmas presents.
[The Daily Telegraph page 19 - 16.11.07. Also reported in Daily Mail page 97, The Times page 58, The Guardian page 27, The Independent page 51 and Financial Times page 5.]

Debt crisis set to worsen next year, says CSA

Debt crisis set to worsen next year, says CSA

According to the Credit Services Association (CSA), which represents the debt collection industry, the UK debt crisis is set to worsen in 2008, with as much as £24.3 billion worth of debts to be passed on to the debt collection industry. The CSA says that £22.7 billion will be collected in 2007, and next year’s figure could even top the £24.3 billion predicted. “Over-indebtedness will be accelerated by more fixed rate mortgages becoming variable at higher rates, and access to new credit becoming harder,” a CSA spokesperson said. “Consumers are tightening their belts against the background of a credit squeeze. Access to credit is becoming increasingly difficult as lenders tighten their lending scorecards.”

Credit crunch has hit 25% of mortgage transactions

Credit crunch has hit 25% of mortgage transactions

According to new research by GE Money Home Lending, one in four mortgage transactions handled by UK brokers has been adversely affected by the credit crunch. Since the crisis hit the global banking market in September, some 87% of all brokers have felt the consequences, with lenders withdrawing products at short notice or changing lending criteria or pipeline dates. “During these challenging times there will inevitably be changes to ranges with shorter notice periods, but communication is key and lenders should endeavour to give brokers reasonable notice of alterations in product ranges and changes to pipeline dates,” said GE Money sales director, Duncan Berry. “Brokers are not a naive bunch, so have a realistic attitude when it comes to lenders changing ranges in the current market.”

Unemployment rose over the summer

Unemployment rose over the summer

The number of unemployed people in the UK increased by 6,000 between July and September to 1.67 million, figures from the Office for National Statistics (ONS) have shown. There was also a fall of 9,900 in the number of people claiming unemployment benefit to 824,800. The total employment level was 29.22 million, up 69,000 on the previous three months, and up 178,000 on the same period a year ago. Average earnings also rose by 4.1% in the three months to September compared with a year ago. Excluding bonuses, however, overall average earnings rose slightly less than expected, up 3.7% in the three months to September against forecasts for a 3.8% increase. The figures will bolster the view that the Bank of England is in no hurry to cut interest rates

Barclays reveals £1.3 billion loss

Barclays reveals £1.3 billion loss
Barclays revealed that it has written down £1.3 billion of assets because of the turmoil in the mortgage and credit markets, and has warned that the crisis is far from over. Barclays’ investment arm, Barclays Capital, made a £800 million write-down in October and a £500 million write-down in the third quarter of the year. The write-down was less than feared, and the bank said that Barclays Capital’s profits were higher than last year. “Today’s extensive disclosure demonstrates the strength and resilience of our performance during the year and in particular during the turbulent month of October,” said Barclays chief executive John Varley. But Bob Diamond, president of Barclays Capital, warned that the group has an ongoing exposure to the sub prime market. “The issues in sub prime are deep,” Mr Diamond said. “The leverage is severe and will take one or two years to work its way out.”

Large increase in remortgages over past six months

Large increase in remortgages over past six months

As the market slows, more homeowners are choosing to remortgage than move up the property ladder. Figures from the Spicerhaart Financial Services monthly survey have shown an increase of over 35% in remortgages since April, with 24% of borrowers now remortgage customers. “The increase in borrowers choosing to remortgage their property is largely due to the tightening of the purchase market as a result of the credit crunch,” said Steve Cox, operations director of Spicerhaart Financial Services. “Consumers coming to the end of fixed rate deals have contributed to the shift as they look to secure competitive deals, of which there are plenty of opportunities.”

House prices fell for third month in a row

House prices fell for third month in a row

According to the Royal Institution of Chartered Surveyors (RICS), house prices fell for the third month in a row and at their fastest pace since July 2005. RICS claim that 22.2% more chartered surveyors experienced a fall than a rise in prices, and inquiries from potential buyers fell for an eleventh straight month. Surveyors were also more pessimistic about the price outlook than at any time since April 2003. “Past interest rate increases combined with a tightening in mortgage lending conditions have prevented many would-be buyers from getting on the housing ladder,” the RICS statement said. RICS said sustained weakness in demand was resulting in greater stocks of unsold property and looser market conditions. The ratio of completed sales to the stock of unsold property fell from 38.3% in September to 35.7%, its lowest since May 2006.

More house buyers pull out at the last minute

More house buyers pull out at the last minute

As many as a third of house buyers are pulling out of purchases at the very last minute after getting cold feet amid fears of a property slump. According to mortgage broker John Charcol, there has been a rise of more than 50% in the number of purchasers dropping out in the last six months alone. Jeremy Leaf, a spokesman for the Royal Institute of Chartered Surveyors (RICS) said: “Six months or a year ago, roughly 80% of deals went through, but that figure has fallen to typically 60%. People have become worried about price levels and are afraid that if they go ahead today, the property will be worth less in a few months’ time.”

Inflation rises above Government’s 2% target

According to the Office for National Statistics (ONS), the UK’s inflation rate stood at 2.1% in October, higher than September’s 1.8% and above the Government’s 2% target. The main upward pressures on the Consumer Prices Index (CPI) came from rising food and petrol prices. The largest downward contribution to the change in the CPI annual rate came from gas and electricity bills which both fell slightly this year as a result of the continued phasing in of tariff reductions. The Retail Prices Index (RPI) inflation rose to 4.2% in October, up from 3.9% in September. The main factors influencing the RPI were similar to those affecting the CPI. Many analysts now believe that the rise in inflation reduces the prospect of the Bank of England cutting interest rates this year.