Something\’s happening

In the mortgage market.

Home owners have been offered some relief as a lender cut one of its mortgage rates by almost one per cent – an unprecedented move in the current climate.

While several high street lenders have cut their rates in recent weeks – often more than once – the cuts have been limited to smaller amounts.

First Direct, which is part of HSBC, has taken between 0.29 per cent and 0.99 per cent off several deals. This includes cuts to its two-year fixed rate offset mortgage from 5.98 to 4.99 per cent.

What needs to be remembered is that mortgage rates (indeed, any long term interest rates) are only loosely connected with hte bank rate. Sure, the Bank of England can raise or lower base rates as it wishes, but that is only the rate at which hte BoE is willing to lend to other banks. This influences long term rates, yes, but does not determine them. It\’s entirely possible for long term rates to be above, below or the same as the base rate (a little odd to be below but it\’s possible).

In other words, long term rates are set by the market, although influenced by the BoE.

One of the problems we\’ve been having over the last 12-18 months is that the mortgage rate has been much higher, well over the BoE rate, than it normally is. These new deals show a shrinking of that premium.

Now this may or may not be a good idea but that\’s not the point here. That that premium is shrinking shows that something has changed in that market for long term money. Liquidity, to a point, is returning. Liquidity is a good thing, so this is good news.