The UK has been greeted on its return to work today with the news that mortgage approvals rose 4% in the month from January to February this year.  Good news most will say.  However, the question that remains is is the UK market beginning its recovery, or is this simply a blip in an otherwise continuing downward spiral?

A number of property indicators in 2009 have suggested some form of recovery is under way.  From my own network of contacts in the property industry, January and February were certainly upbeat months.  So who is buying?  It seems it is a combination of first time buyers and property investors keen to take advantage of what they see as value in the market. There is certainly an increased level of demand from first time buyers who, having previously not been able to get on the ladder and have saved in the meantime, and now in position to take advantage of lower prices.

Many property investors, who will abide by the “buy low, sell high” philosophy, see an opportunity to buy up stock previously out of their reach.  Due to the increased numbers of repossessions, the Below Market Value (BMV) industry has certainly exploded in the last 3 months, with investors looking to buy at anywhere between 20% and 30% below market value on second hand property, and as much as 60% below market value for unsold developer stock.  These factors, combined with a stabilising in mortgage rates and products has led to increased enquiries, sales, and therefore the improvement in nationwide data released by various bodies.

In addition to this, lower interest rates have meant homeowners, specifically on tracker mortgages, have in some cases more than halved their monthly outgoings.  The government can therefore argue that lowering rates has put more money back in some people’s pockets.  However, it has been well documented that rate cuts have not, in the main, been passed on, so the financial easing has not affected the whole homeowner market.

So where are we?  Well general economic data would suggest the bottom has not quite arrived.  Job cuts are still being made and mainstream lending does not appear to have improved much.  Coupled with the facts that repossessions are still rising and general transactions between homeowners are still low would suggest that there is a blip in the market.  However, supply and demand are still fundamental when looking at the property market.  As prices fall, demand generally increases, and there is no doubt that demand has increased in 2009.  One could take a further view that if property prices continue to fall, the demand will continue to increase from both increased levels of first time buyers and investors looking for even better deals.  Therefore, it is my opinion that the property market will find a natural recovery point in the not too distant future.

Although interest rates are a funny old thing, sometimes good for us and sometimes not so, they play a vital and pivotal part of the UK’s financial stability and are used to try to control the economy.

According to Wikipedia :

“An interest rate is the price a borrower pays for the use of money they do not own, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.

Interest rates targets are also a vital tool of monetary policy and are used to control variables like investment, inflation, and unemployment.”

History of Interest Rates

In the 17th Century, The Bank Of England was set up by William of Orange and proceeded to loan the Government of the time around one million pounds to help rebuild the country and help to finance wars and missions overseas. The early days of Interest Rates rarely saw any movement, with rates moving only twice in the 18th Century, moving lower and then increasing towards the end.

1840 saw the beginning of the rise and fall of interest rates, with the Bank of England moving rates many times from 1847 to the current day. The rates were changed by many things, war, economy and even the collapse of London bank, Overend, Gurney and Company caused the rates to rise a massive four times in May, finally hitting 10%, only the second occasion this had happened up until that point.

In 1890 the Bank of England had to bail out a major bank in Barings, which helped to avoid the collapse of the whole banking system due to heavy losses overseas, mainly in Argentina. Fast forward around 100 years and the interest rates hit their highest every peak to date, reaching a massive 17 percent, which introduced the early governing months of the Tory party, led by Margret Thatcher.

Despite a large rise in 1992 to avoid Black Wednesday, which was soon reversed, interest rates have generally fallen, which brings us all the way to 2009 where interest rates reached their lowest every point in their 300 year history, touching 1.5% as the UK faced recession.

What do Interest Rates mean to you?

As a general rule, if you do not own a home or have much in savings, they may not mean much.

When the interest rates are low, borrowers on tracker mortgages generally pay less per month for their mortgage as long as the lender passes the cut on, but your savings earn less in terms of interest. The opposite occurs when the rates are high, as borrowers on tracker mortgages generally pay more, but you earn more on your savings. Of course, borrowers on a fixed rate mortgage will be unaffected in terms of mortgage repayments.

Loans tend to be unaffected as a general rule, as most borrowers with a personal loan will be on a fixed rate. If recent events are any indication then rates for new customers are also unlikely to fall.

History has shown that the Bank of England has successfully controlled the finance of the UK by raising and lowering interest rates when needed, if this were not the case then we would be in serious trouble now. Although the latest cut does indicate significant problems ahead, taking this kind of action will help millions of people survive the next couple of years, and as for the question will they rise again, yes, of course they will, it’s only a matter of time … and more interest rate history will be made.