Rate cuts will carry few over the threshold

_By Rosemary Gallagher_

FUTURE interest-rate cuts by the Bank of England are unlikely to make buying a house any easier for borrowers because the credit crunch is making it more difficult for lenders to raise funds.

While borrowers are hoping for a reduction from the current Bank base rate level of 5.5 per cent next month, this is not expected to have the hoped-for effect of reducing monthly mortgage repayments for those on deals which track the rate. Despite the 0.25 percentage point reduction in the rate in December, lenders have been increasing their tracker rates and fixed rates have fallen only slightly.

As Melanie Bien, director at the independent mortgage broker Savills Private Finance, said: "The problem is that, while three-month Libor – the rate at which banks lend to each other – has fallen from the highs seen last autumn when the credit crunch hit, the securitisation market – a crucial funding source for lenders – has all but dried up. This makes it harder to raise funds to provide loans to homebuyers.This situation is unlikely to ease any time soon.

"Although at least two further quarter-point reductions in base rate are forecast, you might be better off with a fixed rate than a tracker."

First Direct has a two-year fix at 4.75 per cent with a £1,498 fee, compared to the best tracker on the market – Nationwide's 5.53 per cent (0.03 per cent over base for two years with £1,499 fee).

Bien added: "Even with two rate reductions, you would be better off with the fixed rate. Whether you opt for a tracker or a fix, if you like the look of a deal, you should move quickly to secure it." She points out that Alliance & Leicester's new two-year base rate tracker is now 5.94 per cent (Bank base rate plus 0.44 per cent) with a 1 per cent fee. The previous rate was 5.74 per cent with a flat £599 fee and Woolwich's lifetime tracker has gone from Bank base rate plus 0.47 per to plus 0.69 per cent.

With the situation not getting any easier for homeowners or those already on the property ladder, many people may decide to rent instead and this could help protect the buy-to-let market against any economic downturn.

David Alexander, owner of DJ Alexander, estate and property managers, with offices in Edinburgh and now London, said: "This is a very difficult time for the market in Scotland and across the UK because of the credit squeeze making it harder for people to borrow money and we have all the classic signs of a recession.

"But a quieter sales market can give a boost to the rental market. Rising rents and falling interest rates – which are expected – are good for landlords.

"A number of landlords may want to liquidate their assets but I would recommend they sit tight."

Scott Brown, partner at Edinburgh-based Warners Solicitors and Estate Agents, agrees the city's housing and rental sectors should hold up.

He explained: "It's not been hard to miss the headlines of doom and gloom hanging heavy over the property market. The predictions of a slowdown have had commentators working overtime, prophesying a complete crash at worse or negative growth at best. I agree that Edinburgh and the Lothians won't escape unscathed from the uncertainty, but its unique marketplace will once again allow it to weather the storm better than the rest of the country.

"I estimate we will still see growth in prices of between 1 and 4 per cent. More importantly, we will still see considerable buying and selling in the market, helping to maintain confidence and keep prices buoyant.

"Another major factor is the consistently strong buy-to-let market. Even when rental rates go up, there is still a steady stream of tenants looking for accommodation – particularly because of our universities and from young professionals and second-generation home-makers.

The Scotsman, 26/01/08