Base rate cuts

17 December 2008

Miles Brignall has warned Guardian readers this Saturday that borrowers with tracker mortgage, may not see big reductions in monthly costs. There are terms which allow lenders not to pass interest rate cuts, even if you mortgage should track Bank of England base rate. Borrowers on standard variable rate may see very little advantage in interest rates cuts as recently lenders were not in the rush to pass on any reductions to their customers. Earlier this week we have learned that half of lenders didn't reduce their variable rates, despite Bank of England decision to cut base rate by 0.5% last month. Experts worry, that banks can use base rate cuts to their advantage to restore their profitability. Tracker rate holders are expected to benefit more than anybody, as their mortgage should Bank of England Rate, however some lenders have "collars" in their terms, which mean that interest rates will not go below certain rate, irrespectively of base rate cuts. As an example, Nationwide customers will not see their rates go below 2.75%, Halifax will not pass rate cuts below 3%, but Abbey, RBS and Woolwich will go as low as Bank of England Rate will. HSBC reserves the right not to pass interest rate cuts depending on market condition. Customers applying for a new tracker mortgages will notice that margins offered have increased from 0.25% above the Bank of England Rate to 1.5%-1.75%. Michelle Slade, from Moneyfacts says: "Despite the best efforts of the Bank of England to bring borrowing costs down, lenders just aren't passing the cuts on toconsumers. Base rate used to be a major barometer when determining mortgage rates, but it could become an obsolete component if mortgage lenders do not pass cuts on".