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Interest rates to fall again - and to carry on doing so this year


6th January 2008 | back to article listings BACK    print this article PRINT

With rates dropped before Christmas in December's Bank of England rate decision we saw the beginning of what we expect to be a fairly quick series of base rate reductions. The talk this month between the members of the MPC committee will mainly centre on whether to drop rates this week or at the beginning of February instead. Just like last month there will again be discussion of whether to drop half a point rather than quarter of a point. Our overall expectation is that it is extremely likely rates will be dropped by another quarter of a point this month and if not this month, certainly at the beginning of February. There will be another quarter point drop by the beginning of April at the latest.

This will take base rates back to 5% which we've always said was around the neutral level but with the American sub prime market problems still reverberating around the financial world we would not be surprised to see base rates going slightly below 5% and 4.5% or 4.75% are likely to be where rates level out by the end of this year.

There's been much talk of these base rates not being passed on to mortgage holders - this is only partially true and mainly with regard to sub-prime/ adverse clients rather than good-credit clients. There has also been much talk of mortgage rates remaining high even if base rate drops due to LIBOR, the interbank lending rate, being artificially high recently with the credit problems. What most commentators have got wrong is that most buy to let mortgages are not related to LIBOR and also LIBOR has come back over the New Year to be much closer to its normal premium over Base Rate. Don't believe everything you read in the press, in fact at the moment believe very little as is almost entirely hype from dyed-in-the-wool property bears.

We still say the best mortgage products to purchase at the moment are the base rate trackers - with base rates coming down so fast and hard you're going to see some pretty good payable rates later in the year. Our Assetz Finance division has plenty of great products so at risk of repetition don't believe the press comments that great mortgage products don't exist at the moment provided you've got a decent credit rating - they do.

The fundamental upward pressure on rents continues and details of all of the market participants confirming that this is happening are in my previous blog entries. In summary, the majority of adverse credit history mortgage applicants are being turned down, homebuyer mortgages are more expensive than buy to let mortgages now, the housing shortage hasn't gone away and is being made worse by developers slowing down their build programmes due to more difficult credit conditions (EC Harris, the global property development project managers are the latest to confirm this).

Combine this with developers giving bigger discounts against current RICS market valuations, and some private vendors agreeing to 'cheeky' bids and the net combination is an excellent buy price versus rental yield versus mortgage cost combination leading to a profitable acquisition for your portfolio.

May we take this opportunity to wish you a prosperous and happy New Year and may 2008 provide you with excellent property investment opportunities - we are sure we will be bringing you many.

Stuart Law

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.


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