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A Turning Point for interest rates?
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A Turning Point for interest rates?

20th May 2008

Last week Nationwide announced that they would be reducing the interest rates on some of their mortgage deals. This was very significant as Nationwide is the second largest lender in the UK. In response to this move, the Abbey National the third largest mortgage lender with a market share of 12.9% also dropped some of their rates. We are also told on good authority that Royal Bank of Scotland group also plan to reduce rates. (You heard it here first!). The Royal Bank currently has a market share of 12.2% and is determined to overtake Abbey’s National’s number three position.

The one thing all of these lenders have in common is that they are lenders with strong balance sheets. So-called balance-sheet lenders are banks that raise the funds for mortgages from the deposits made by their savings and current account customers. As a result they are less exposed to the money market problems being faced by other lenders who have lent money primarily by borrowing it first themselves.

So after weeks of lenders increasing rates, in an effort NOT to be the one with the best rates on the market, there seems to have been a change in view. What could have caused this?

Nartionwide said that recent reductions in money market rates meant they were able to reduce the rates on their two-year and five-year fixed rate mortgages. The Abbey said it was making these changes in response to reductions in its own borrowing costs as a result of the Bank of England’s recently announced special liquidity scheme. The bank said it hoped that the effect of more cash being available to banks would mean a reduction in the interest rate that banks lend to each other known as LIBOR and ultimately lower the interest rate(s) offered to consumers.

Also nearly two weeks ago UBS – the European Investment Bank with the largest exposure to the US Sub-prime losses managed to sell off its mortgage book. This means that someone out there still believes that there is value in purchasing what are known as "mortgage backed securities".

With lenders now looking to increase their market share and investment banks being able to sell mortgage backed securities again, we are all hopeful that these announcements are the first shoots of recovery for the mortgage market with liquidity and more importantly normality returning soon.