Bank of England rate cuts aren't bringing mortgage costs down

[LONDON] UK home buyers returning to the market after the coronavirus lockdown are finding they're not benefiting from record-low central bank interest rates.

Five months after the Bank of England (BOE) slashed its benchmark to 0.1 per cent, mortgage rates have barely changed as banks fret about risks. For people with smaller deposits, average borrowing costs actually increased by more than half a percentage point between February and July.

It's another blow to younger Britons who were already increasingly priced out of the property market. It may also make the BOE less likely to cut rates further, even if the economy weakens again, according to Nomura International economist George Buckley.

"It will affect their decision making, they'll look at this and say well actually, what we've done has been completely offset by the fact that mortgage spreads have gone up," Mr Buckley said.

One reason for lenders' reticence is that they don't see their risk declining. The UK just endured the deepest recession on record and unemployment is rising. The rate gap between loans with a 10 per cent and 25 per cent down payment is now the biggest in five years.

The housing market, which has picked up in recent months as lockdowns eased and the government temporarily cut taxes on home sales, could be heading for a bust, real estate agents warn.

POLITICAL ISSUE

Home ownership is a national obsession in Britain after house prices more than quadrupled in the past three decades. That makes it a political issue for voters as well as an economic one.

"We're hearing of first-time buyers hanging on the phone to get through when the banks or building societies open in an attempt to get a very restricted number of mortgage packages for them," Siobhain McDonagh, a lawmaker in the opposition Labour Party, told BOE officials at a Parliament hearing on Wednesday.

BOE policy maker Gertjan Vlieghe acknowledged that credit for younger buyers has become tougher to get, but that it's not for the central bank to dictate how much higher mortgage rates should be for those with smaller deposits, as there's a bigger risk associated with those loans.

"It's right that there should be a higher interest rate attached to it" and the prospect of increasing joblessness means that mortgages taken by young first-time buyers could become even more expensive, he said.

The Covid-19 pandemic is already threatening to scar young workers starting out in the labour market as they compete for fewer jobs. Restricting access to credit is another strain.

Lenders are even cutting off the bank of mom and dad.

Nationwide, Britain's largest building society, has stopped approving mortgages in which parents contribute more than a quarter of their child's deposit, according to a report published this month by Pantheon Macroeconomics. Meanwhile, Lloyd's Bank has stopped issuing loans where parents can act as guarantors.

"These steps are to ensure that only the buyers in the strongest financial positions can currently access mortgages," writes Samuel Tombs, an economist at Pantheon.

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