As 2007 ended, interest rates came down for the first time since August 2005. With signs that the economy was slowing, the Bank of England's Monetary Policy Committee (MPC) shaved a quarter of a percentage off the rate in December, lowering it to 5.5 per cent, with analyst forecasts that further cuts may follow during 2008.
Major mortgage lenders also cut their rates, despite fears by some market observers that they would not do so. It coincided with surveys showing a slump in consumer confidence and the Royal Institute of Chartered Surveyors reporting in November that house prices fell for the fourth month in a row.
There are also indications that repossessions of property are rising significantly and some auctioneers have noted in the past year that the proportion of repossessed properties they are selling has risen from 25 per cent to 50 per cent.
The background is one of continuing uncertainty in the financial markets, particularly in LIBOR (London Interbank Offer Rate), the rate at which banks lend to one another. Normally, they are on a similar level to the base rate, but recently it has been as high as 6.75 per cent, making a LIBOR-linked mortgage more expensive. With ongoing problems in the American mortgage market and the ensuing credit crunch, there remain concerns that banks will be less willing to lend to consumers and businesses.
Some analysts have also flagged up a warning to the buy to let sector, particularly with it now accounting for 12 per cent of all mortgage advances in the UK compared with just three per cent in 2002. They say with the changing marketplace with house prices slowing and lenders more wary in the wake of the recent credit crunch it is more important than ever for buy to let landlords to seek professional guidance and research carefully any move they are considering within the market. Interest rates had been pegged at 5.75 per cent since July, though that increase was the fifth rise within a year and early in 2007 economists' forecast rates would hit six per cent by the end of the year.
In September the MPC took the rare step of releasing a statement after it left rates unchanged, making it clear it was considering the effects that the credit crunch could have on the rate of inflation. In September, inflation stood at 1.9 per cent, fractionally below the government's two per cent target, though high oil and food prices edged that figure to 2.1 per cent for October. But back in January it stood at an 11-year high of three per cent. However, the RPI inflation measure, on which many pay deals are based, rose to 4.2 per cent in October from 3.9 per cent. UK inflation remained unchanged at 2.1 per cent in November with the higher petrol prices offset by lower utility bills.
On the latest interest rate move, the British Chambers of Commerce economic advisor David Kern said: A cut in rates was clearly needed to counter growing international threats emanating from the US and to unblock dangerous obstacles preventing the banking system from operating smoothly. He added that if credit conditions remained tight, further interest rate cuts may be required in 2008. The market remains in a state of uncertainty. However, if house prices continue to fall and repossessions rise, there could be lots of opportunities for landlords. Perhaps now is an opportune moment to review their property portfolio and seek guidance on their options. s
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