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Mortgages - Bank of England Saves Mortgages with £50 Billion Pledge

The Bank of England’s £50 billion Pledge to Homeowners

The Bank of England seeks to releive pressure on the banking industry with a £50 billion deal. The banks will receive gold plated government bonds in exchange for £50 billion worth of mortgages signed over to the Bank of England. The move signals safer investment for the banks and offers security to borrowers.

By bailing out the banking system in this way, the Bank of England seeks to ease the tightening mortgage situation. By releiving banks of some of the mortgages which they cannot cope with, there is hope that the lending freeze that has enveloped the mortgage market will end. The tightening up on cheap deals has come as banks are not lending to each other, removing liquidity and competitive deals from the market. Cheap mortgage deals and 100% mortgages have come to an end as banks are lending more cautiously.

Homeowners coming to the end of cheap fixed rate deals are in for a repayment shock with their new mortgae deals. Where they had a fixed rate of 4.3% before, similar deals availiable now have a typical rate of 5.5%. For a mortgage of £200,000, this equates to an extra £200 in mortgage repayments per year.

There are worries that the move by the Bank of England may not have much impact on the lending market. While banks are releive that the presure on them is reduced, it is unlikely that they will be rushing to offer such cheap deals again so soon. They have no plans to lower rates or reinstate 100 and 125 per cent mortgages.

What the government hopes the change will do is restore confidence in lenders, prompting them to lend t each other more freely and offer a wider range of deals again. Unfortunately, it is unlikely that banks will be in a hurry to lend so freely again as they feel they have been stung by the sudden drop in the economy.

Many feel that 100 and 125 per cent mortgages were never a good thing on reflection. They are keen to tighten up on lending and act more responsibly in the future, avoiding cases where they find that their customers cannot repay them.

After going through a golden period in the nineties where house prices steadily rose and credit was cheap and easy for both banks and customers, we are now facing a slow down in the market which is unlikely to be halted by government owned cash.

The slow down is not something to be alarmed about and this move by the Bank of England will offer more security to both banks and lenders, ensuring that this econmic slowdown does not end in a dramatic market crash, merely a long overdue check on reality for lending institutions and the heavily indebted British public.

Carys Robshaw