Lenders sceptical of Bank offer

High street banks are showing initial scepticism of the Bank of England's asset swap proposals, and refusing to drop interest rates.

Since the Bank made its proposals on Monday, presenting lenders with an opportunity to swap up to £50 billion worth of mortgage assets for bonds, the cost of borrowing has fallen by just 0.04 per cent.

Furthermore, the spread between LIBOR – the rate at which banks lend to each other on the financial markets - and Bank rate remains a significant 0.88 per cent.

This has made wholesale funding expensive to obtain, and consequently retail lending has been significantly restricted.

"Alastair Darling is urging lenders to reduce their rates but any improvement to consumers’ options will come very slowly whilst lenders’ supply of wholesale money is still so pricey," explained Katie Tucker of brokers John Charcol.

"The highest risk is to those borrowers unable to remortgage to an affordable rate when their existing deal ends, so it is encouraging that lenders have pledged to treat repossession as a last resort."

Following a meeting between the chancellor Alistair Darling and the Council of Mortgage Lenders (CML) this week, lenders agreed to reaffirm their commitment to treat borrowers fairly.

As a result options such as going interest-only for a period and even payment holidays, which involve deferring interest, could now be an easier option– although lenders made no certain promises.

However, the days of easy credit, at above 100 per cent loan-to-value levels, will be gone for a number of years.

"Mortgage rates may stop rising but they won’t return to the exceptionally low levels of last year, because the lenders were not pricing at cost in 2007; they were pricing at a loss to attract market share of borrowers," explained Ms Tucker.

Research from Charcol finds borrowers on £22,000 a year in wages who would previously have been able to get 3.75x income on a mortgage, can now secure just 3.25x.

Chris O'Toole