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Not in the interests of the market

By KFH

 John Phillips, Financial Services Director at Kinleigh Folkard & Hayward thinks that the interest rate cut isn't all it's cracked up to be - not for the property market, anyway...

"Of course, we've welcomed the decision of the Bank of England to cut interest rates to 2% for the sake of borrowers with existing mortgages. Anything that saves the mortgage payer any amount of money has to be a good thing for the marketplace, right? 

Well, actually, no. 

Cutting interest rates may deter people from putting money into savings, it may even entice them out to the shops, but what it won't do is free up the market.  The current difficulties within the market will not cease until lenders address the Loans to Value problem.

New entrants to the market place currently need to save a deposit of 15% to even have a hope of getting onto the property ladder.  For a property in London, that would probably equate to roughly £37,500.  Now, how many first time buyers can raise that kind of deposit? The answer is very few, and probably even fewer now that the interest awarded to their savings has just been cut by another percentage point.

If lenders were to start offering mortgages of 95% at a reasonable rate, this would kick start the market.  As soon as a couple of lenders raised LTVs, the market would ease and would start to flow freely again.  However, lenders are afraid of property prices dropping further and will not take the risk of negative equity."

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