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Good News for Mortgages

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Good News for Mortgages

In an effort to stem the economic decline and the crash of the world economies, governments round the world have taken some drastic – and very expensive – measures. Among the largest are the US Federal Reserve, which has injected almost US$1 trillion of funds, and the British government, which has come up with a £500 billion rescue scheme. The general public – the taxpayers whose money is financing these schemes - has tended to view these measures with scepticism, believing them to be of more benefit to bankers than the taxpayer. However, the latest ingredient in the worldwide recipe to cure the recession – reduction of interest rates – is certainly far more benefit to the individual, particularly the homeowner.

In what appears to be a unified decision by the US, UK and Europe, the reduction in the base interest rate of 0.5% is an attempt to kickstart lending and borrowing within the banking sector.

The Bank of England reduced interest rates by 0.5%, the largest cut since November 2001 bringing rates in the UK to 4.5% (the lowest rate for 3 years); the European Central Bank cut rates in the eurozone to 3.75%; and the US Federal Reserve has brought rates down to 1.5%. Canadian, Swedish and Swiss central banks have also followed suit and lowered their base rates.

While the move is perhaps not so welcome to those with savings account, a reduction in interest rates is excellent news for the millions of mortgage owners throughout the world. In the UK alone, around 4.7 million borrowers in the UK whose mortgages are tracker or variable rate will benefit from the base rate cut in the Bank of England lending rate. For example, a homeowner with an existing ₤200,000 tracker mortgage could save ₤700 a year, a considerable financial benefit in times of recession.

The move is also extremely welcome for investors who have bought property overseas with a mortgage. Those with mortgages in the eurozone have seen months of successive rises in the base rate with the subsequent increases in monthly repayments.

As the global economic crisis deepens, interest rates are expected to fall still further. Some UK analysts predict that rates will drop as low as 2.5% in the coming months. “After months of climbing interest rates, the recent drops are excellent news for homeowners planning to remortgage or release equity,” comments Ken Thorkildsen, Director of Obelisk Private Finance. “The reduction also brings a welcome boost for those financing an investment in property overseas.”
 

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