More than one month after the Bank of England cut interest rates, nearly 20% of mortgage lenders still haven't cut their variable mortgage rates. Why? Are lenders struggling or are they merely profiting from the tightening market?

A couple of weeks ago it was revealed that one month after the Bank of England cut the base interest rate to 5.5%, 14 lenders - nearly 20% - still had not cut their mortgage interest rates.

As a result, even the Prime Minister stepped in and commented that lenders ought to do the decent thing and cut rates in line with the Bank of England. But is it that simple, and is 2008 set to be a much tougher year for lenders and borrowers?

Difficult Market Conditions

UK Mortgage lenders reacted furiously to Gordon Brown's suggestion that they should cut rates in line with the Bank of England base rate.

They pointed out - reasonably - that current conditions in the money markets mean that directly linking the base rate and lenders' standard variable rates is quite misleading. The real problem, say lenders, is that the short-term cost to them of borrowing money is staying high - and didn't fall when the Bank cut rates in December.

There's certainly some truth in this; recent months have seen the spread between the base rate and the 3-month interbank lending rate reach record levels - meaning that mortgage lenders are paying more of a premium than usual for the money they borrow.

Are Things Really That Tough for Lenders?

Since the beginning of January, money market lending rates have fallen noticeably - presumably offering a respite for hard-pressed lenders. Despite this, fourteen mortgage lenders still hadn't announced cuts to their variable mortgage rate by the 8th January - although many were quick to cut their savings rates back in December.

It seems likely that many UK mortgage lenders are preparing themselves for a tougher 2008 by increasing their profit margins while they can.

With mortgage approvals over 40% lower in November 2007 than November 2006, lenders may be worried that a housing crash is on the way. UK Residential Repossessions are forecast to rise by 50% this year (RICS) - coupled with falling prices, the resulting bad debt could cost lenders dearly.

What Does It Mean For Borrowers?

Mortgage lenders look like they are reaching the end of one of the most profitable housing booms in history. New mortgages and remortgages will be fewer and harder to get in 2008 - and they will probably also have higher interest rates than many borrowers are used to.

This means that in 2008, shopping around and comparing quotes when remortgaging will be even more important than usual - especially for anyone with an imperfect credit history. Expert mortgage brokers are likely to be in strong demand as the best deals get harder to find - on or off the high street.

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