With interest rates being cut to a new historic low, the effect on the UK property market is expected to differ depending on location.
Many borrowers may see the move as headline ‘good’ news. However, a response by the banks, similar to that seen during the credit crunch, could have a particularly negative impact on domestic borrowers in areas such as Greater London and the rest of the UK.
During the global financial crisis, banks widened their margins in the face of decreasing Bank of England base rates to maintain profits and build up capital reserves to hedge against any losses during a period of economic uncertainty.
In recent years, we have seen those margins contract with the result that many homeowners and investors have been enjoying unprecedentedly low borrowing rates. However, we would expect to see banks reverting to their previous strategy, thus having an impact on affordability for new buyers or those looking to remortgage.
Another Brexit protectionist measure could be a withdrawal from the market of the highest loan-to-value products, as banks factor in a potential reduction in capital values across the domestic marketplace. This will inevitably further affect retail lending and buyers’ ability to trade up, potentially restricting capital growth potential in the domestic market and becoming a self-fulfilling prophecy.
On the whole, the cut appears to be somewhat premature, with most indices indicating business as usual since the vote and most economic statements being opinion based, not fact based.
For the time being, those already on tracker products will benefit and in areas such as prime central London, where investors are not highly mortgage dependent, the news will have relatively limited impact. For most buyers, however, across the rest of the UK, the feel-good factor of a cut could well be short lived as banks move to protect their bottom lines and mortgage availability is once again restricted.
Naomi Heaton, CEO of London Central Portfolio