Cheaper loans soon for millions

MILLIONS of home owners can look forward to a happy New Year with interest rates set to tumble, experts predicted last night.

RELIEF Bank Of England expected to announce cuts RELIEF: Bank Of England expected to announce cuts

The Bank of England is expected to announce a quarter-point drop as early as next month.

And in a further boost for borrowers, industry leaders said rates may fall to five per cent or even lower by the middle of the year.

Bank bosses paved the way earlier this month by dropping the base rate from 5.75 to 5.5 per cent – the first cut since August 2005.

It is hoped another cut in interest rates will inject life into Britain’s flagging housing market. The global credit crunch, sparked by “sub-prime” borrowers in the US defaulting on their loans, has driven up the price at which banks lend money to each another.

House prices in this country have stalled in recent months as owners nervously await the outcome. Experts believe that the only way to bring down the wholesale price, and make home loans cheaper, is through at least one cut by the Bank of England.

Another cut in interest rates would bring much-needed relief to home owners battling to make ends meet.

Five interest rate rises since August last year have taken their toll on many families. Nearly a million households are now finding it hard to meet their repayments, the Bank of Engand revealed this week. A further 1.8million people say they have had problems meeting their repayments “at least occasionally”.

Some have been forced to take drastic action, with more than one million borrowers thought to be using their credit cards to cover mortgage or rent payments.

The news comes as analysts warn that the number of home repossessions could hit 70,000 next year – the highest since 1991.

Property expert Ray Boulger, of mortgage advisers Charcol, said: “A cut in January or February is very likely.”

Hopes of a drop were fuelled by a report yesterday showing a lower than expected rise in the cost of living. Experts believe the better-than-expected figures will put pressure on the Bank of England to announce another interest rate cut.

A quarter-point cut would reduce the monthly repayments for a typical borrower with a £100,000 mortgage from £656.23 to £640.78. A half-point cut would save them around £30 a month. Bernard Clarke, from the Council of Mortgage Lenders, said: “While the first cut was welcome, we are looking to see more early in the New Year.”

Figures released yesterday showed that the consumer price index – which is the Government’s preferred measure of inflation – remained unchanged at 2.1 per cent last month.

Although the figure is still above the Government’s target of two per cent it is below what analysts had forecast and it came despite big increases in a host of areas which have put a squeeze on household budgets.

Petrol prices rose 3.5p last month, taking the nationwide average above £1 a litre for the first time, according to research from the Office for National Statistics. With diesel up by 5p a litre over the month, drivers are now paying almost a fifth more than last year to fill up with fuel.

Families have been further hit by a sharp rise in the cost of the weekly shop. Price hikes for some everyday food items, including bread, milk, cheese and eggs, have reached record levels.

There have also been big cuts in the cost of other essential outlays, which helped to keep a lid on the overall cost of living.

Energy bills, after three years of sharp hikes,  have finally begun to fall. The average electricity bill is 3.3 per cent less and gas 11.3 per cent lower than in November last year, according to the ONS research.

Other goods and services which have dropped in price include air fares to Europe, vehicle maintenance, eating out, books and electrical gadgets such as digital cameras.

An alternative method of measuring inflation, the retail price index, rose marginally last month from 4.2 per cent to 4.3 per cent.

The RPI is used by the Government to help determine pensions and benefits.

Jonathan Loynes, chief European economist at Capital Economics, said: “November’s figures confirm that the UK is suffering relatively lightly from the latest rise in oil and energy prices.”

David Page, an analyst at Investec, said: “We believe that the Bank of England is right to be focusing on the longer-term prospect of inflation undershooting its target beyond next year, not overshooting.”

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