Rate cut won't give housing market much help

By Fiona Shaikh - Analysis

LONDON (Reuters) - Homeowners won't get much relief from the Bank of England's quarter-point interest rate cut unless money markets thaw out soon and free up the flow of cash to mortgage lenders.

Experts say rates at 5.5 percent may do little to lessen the pain of the 1.4 million homeowners whose fixed-rate mortgages will expire in the next year unless something can be done to bring down the cost of mortgage lenders' own funding.

The Bank probably has at least two more rate cuts in store next year but lenders may be reluctant to pass them on in full to homeowners as they rebuild battered profit margins.

That means people refinancing mortgages could still face a spike in borrowing costs, stretching over-indebted homeowners to breaking point and intensifying pressure on the housing market, the economy and Prime Minister Gordon Brown's government.

"The cut won't go a very long way to dealing with the situation: either the liquidity squeeze needs to be significantly improved or the Bank rate needs to come down further, or a combination of the two," said Ray Boulger, senior technical adviser to mortgage broker John Charcol.

The main problem lies in three-month LIBOR rates, a benchmark for mortgage loans, which have surged to a near-decade high as commercial banks have hoarded cash and clamped down on lending to each other, wary about their own exposure to risk.

NORTHERN ROCK

Northern Rock was a first victim of this spike, but with money rates still more than a percentage point above official rates -- 3-month LIBOR fixed at 6.60 percent on Friday -- mortgage lenders may face a financing squeeze for months to come.