The Building Societies Association (BSA) is warning the Bank of England that further cuts to the base rate may actually harm the mortgage market.
The Bank is due to meet on Thursday, where it is widely expected to announce a fifth consecutive reduction in the base rate, which is already at its lowest ever level of 1.5%.
These repeated cuts have finally dragged down mortgage lending costs, providing much needed relief to homeowners’ recession-hit budgets.
Availability, not cost is the issue
However, savings rates have also been decimated, leaving little incentive for Brits to set money aside each month.
The BSA believes this may have a detrimental effect on the mortgage market, as it is now availability rather than cost that is the main barrier to mortgage lending.
According to the BSA's recent property tracker survey, affording the monthly mortgage payments was considered a barrier to home purchase by 37% of respondents in December, down from 70% in June 2008 as interest rates fell.
However, concerns over getting a large enough mortgage or getting a mortgage altogether increased from 49% to 56% over the same period.
Need to ensure funds remain available
"So mortgage availability, rather than the cost of mortgages, has become a more pressing issue over the last few months,” says BSA director general Adrian Coles.
“This suggests that what is important to potential borrowers is maintaining the flow of mortgage funds to the market rather than reducing interest rates further.”
According to Coles, building societies and their subsidiaries were responsible for 62% of net lending in the fourth quarter of 2008, and a further reduction in interest rates now will make people even less likely to save.
This in turn will further disrupt the flow of funds into the mortgage market.
"We need to ensure that those with at least some capacity to supply funds for mortgage lending - personal savers - are encouraged to do just that, and that requires [the Bank of England] to refrain from making further cuts to the base rate at least until the impact of recent reductions becomes clearer."
MPC unlikely to listen
However the Bank is unlikely to heed the BSA’s calls: A poll of economists by Reuters found that 65 out of 68 expect another rate cut.
Most of the economists are predicting a 0.5% cut to 1% in a bid to shrug off the deepening recession.
Last week, the International Monetary Fund has revised its forecast for how much the UK economy will shrink this year to 2.8% - almost double its original prediction.
