Everybody is keen to talk about the Bank of England base rate as a reference point when it comes to the cost of mortgages and personal loans and if you’ve got a tracker rate on your loan which is linked to the bank base rate, then this is entirely appropriate.

However, more relevantly perhaps, is the rate at which the banks and building societies in the UK borrow money from each other, as this is the cost of borrowing on the wholesale money market and has more of an influence on the rate which is eventually charged on customer’s loans, as well as reflecting the amount of liquidity in the banking system as a whole.

Despite the fact that the Bank of England announced a half a per cent cut in the base rate of interest earlier this month, many borrowers never saw a similar reduction in the rate charged on their loans and the main reason for this is due to the fact that the LIBOR (London Inter Bank Offered Rate) rate, which is the wholesale rate at which banks are able to borrow from each other, had actually increased at around the same time, to a high point of 6.35 per cent.

This rate reflects the lack of confidence and liquidity within the banking sector itself, if the risk is higher then the rate charged is also higher to compensate for this.

The good news for the money markets and those individuals with mortgages and loans generally, is that since the Government injected £37 billion into the financial system, the rate of LIBOR has dropped slightly and although it has only fallen to 6.085 per cent so far, it is a step in the right direction and shows that some level of liquidity is slowly returning to the market.

As the market continues to stabilise and we see further cuts in the Bank of England base rate, which are expected as early as November, it seems likely that we will also see LIBOR continue to fall and hopefully achieve some closer parity with the bank base rate, at which point customers are more likely to see the rates reducing on their own personal loans and mortgages.

The credit crunch has now been with us for well over twelve months and although many experts are suggesting that we are now at the lowest point and we should hopefully start to see some signs of recovery, it seems unlikely that things are going to pick up any time soon and it looks as though we are in for a long slow recovery period, with matters made worse by the threat of increased unemployment and recession looming over us.

The effects of the current economic slow down are now having an impact on most people living in the UK in some form or another, as people tighten their belts and cut back on non essential items.

But in a large number of cases it is not only the luxuries which have been sacrificed, many households are now finding it difficult to pay their regular monthly bills.

Whilst individuals prioritise their payments by usually focusing on keeping up the repayments on their mortgage along with credit cards and personal loans, the number of people who have missed payments on their utility bills and council tax payments has increased dramatically.

According to research from Moneyexpert.com, the number of people who have missed a payment on their electricity bill has gone from 1.31 million up to 1.96 million in the last six months alone and it is a similar story with gas bills and council tax payments.

In total, somewhere in the region of 5.37 million people have failed to manage to pay at least one of their regular household bills and although home owners are trying to keep up with their mortgage repayments and other debts such as personal loans and credit cards, lenders are continuing to see an increased level of arrears building up on borrower’s accounts.

The good news however, is that inflation is expected to start to fall over the coming months and further interest rate cuts, similar to the one this month, are anticipated, hopefully lowering the cost of mortgages and other loans.

According to the latest figures, published by HM Revenue and Customs (HMRC), the total number of property transactions in the UK has fallen by 53.2 per cent over the course of the last twelve months to the end of September this year.

There were 59,000 housing transactions during the month of September and although this is only slightly lower than the figure for August, which was 60,000, there were 125,000 deals completed at the same time last year.

The main problem in the housing market remains the lack of availability of affordable mortgages and loans as banks and building societies continue to struggle with their own liquidity issues, coupled with a general lack of consumer confidence in the housing and homeowner loan markets.

Hopefully, the recent rescue package launched by the Government will have a positive impact on the market, but it is likely that this will take some time to filter through. The recent 0.5 per cent cut in interest rates should also go some way to restoring consumer confidence, as long as lenders pass on these cuts to those people with mortgages loans, and it is widely expected that the Bank of England will make a further rate cut of another 0.5 per cent in November.

Simon Rubionsohn of the Royal Institute of Chartered Surveyors (RICS) said “this is now having a meaningful impact on both consumer spending and jobs. It has as a result played a large role in pushing the economy to the brink of recession.  There are some signals that housing market activity could be close to hitting a floor but there is a danger that a sharp rise in unemployment could precipitate a further round of fears on the part of buyers.”

Despite the credit crunch, falling house prices and the general turmoil in the global economy, it would appear that many people in the UK who are trying to sell their houses are blissfully unaware of the situation, either that or they seem to think that it doesn’t apply to them, as the average asking price for a house actually increased through the month of October by 0.3 per cent over the previous months figure.

Although this is only a slight increase, it says quite a lot for the mentality of those who are thinking of selling. Either they are feeling particularly optimistic about the Governments recent intervention to rescue the banks and other mortgage and loan providers and think that the recent half a per cent cut in interest rates will mean that potential buyers can now afford higher prices, as their affordability has increased on the back of being able to get a slightly cheaper loan, or the more likely scenario is that they are expecting to be forced to lower the asking price significantly if they actually want to sell and are sticking a bit extra on in the first place in order to try an limit the financial damage.

It is still difficult for a potential buyer to get on the property ladder, or even to move up to the next step, as they require a much larger deposit than they did previously, coupled with the fact that it is now much harder to obtain funding through a mortgage or homeowner loan, due to tighter lending criteria. The average price of a house has become unaffordable for many people looking to buy and vendors need to be realistic about the price they expect to receive for their home, if they actually want to sell it.

A spokesman for Rightmove estate agents said “Any potential buyer will drive a hard bargain, so the temptation to for sellers to price up and negotiate later may seem like a good idea. On the positive side, there appears to be pent up demand at the right price from potential buyers, but there is a substantial difference in the price they are willing or able to pay, compared to what sellers are currently willing to accept.”

There were many reports in the national press last week detailing how the majority of high street banks in the UK have passed on the 0.5 per cent cut in interest rates, made by the Bank of England, to their customers with mortgages and homeowner loans, with many others currently reviewing the rates they charge.

However, a large number of building societies have not made any announcement with regard to cutting rates, even though a week has passed since the Bank of England made the announcement and these more traditional providers of mortgages and loans have been widely criticised for not reacting quickly enough to the situation and passing on the benefits of the rate cut to their customers.

According to the price comparison web site, Moneysupermarket.com, only two out of a total of approximately 59 building societies have said that they are intending to cut their loan rates for borrowers. So far, only the Brittannia and Melton Mowbray building societies have said that their lending rate will benefit from the half a per cent reduction and moneysupermarket has urged other societies to follow suit and announce rate cuts in order to restore some confidence to the housing and mortgage loan markets. 

Louise Cumming of Moneysupermarket.com said that many building society borrowers were often the ones who would most appreciate and benefit from a cut in their mortgage loan repayments, yet a large number of these individuals are paying the standard variable rate of interest on their homeowner loans and in many cases this is in excess of 7 per cent and these lenders “should be ashamed of themselves.”

She also added “Because building societies don’t have share holders to satisfy, they can afford to offer much better terms to their customers, this is what the whole model is based on. They have also not been crippled by the bad debt crisis to the same extent as some of the bigger banks.”