The great interest rate swindle
Interest rates are forecast to fall as low as 2% in the year ahead but thousands of mortgage borrowers may not benefit from cuts because lenders are unlikely to pass the full savings on to them
Now that inflation is believed to have peaked and the price of crude oil is now sliding, economists expect interest rates to fall in 2009 - potentially to as low as 2%. However, despite low interest rates on the horizon, the benefit to mortgage borrowers could be non-existent.
The reaction of lenders to the latest Bank of England base rate cut has heightened fears. So far, three-quarters of mortgage lenders have failed to pass on the surprise 0.5% interest rate cut to borrowers, with most keeping their standard variable rates (SVRs) at the same level and only a handful implementing smaller reductions.
For example, Alliance & Leicester has only cut its SVR by 0.25%, while Nationwide has cut its by 0.3% and Northern Rock by 0.15%. HSBC, meanwhile, will not be reducing its SVR at all. Others, such as the Halifax, have passed the full 0.5% saving on, while most lenders have yet to declare their position.
With a growing number of borrowers now sitting on their lenders' SVR as they are unable to remortgage elsewhere, there is a growing concern that banks and building societies are taking advantage of the situation.
Darren Cook, mortgage expert at Moneyfacts.co.uk, says: “Historically, lenders have toed the line in passing on favourable changes to their SVR, but as there have been few base rate changes of late, lenders have had little opportunity to reprice their SVRs to incorporate an increased probability of default, elevated risk and the higher cost of interbank lending.
"With more base rate cuts on the horizon, which in part are intended to reduce the burden of household finances, we could find ourselves in situation where future MPC decisions on a rate cut will have little or no bearing on the majority of current household’s mortgage outgoings and could ultimately result in an increase in repossessions.”
Ray Boulger, senior technical manager at John Charcol, agrees that borrowers should not count on lenders passing on base rate cuts. "There is no doubt that, in the current climate, an increasing number of lenders will pass on fewer benefits with each further base rate cut," he predicts.
SVR mortgage borrowers are not the only homeowners set to be hit by lenders' reluctance to pass on cuts - tracker rate borrowers are also likely to suffer. Because this type of mortgage literally tracks the Bank of England base rate, many borrowers assume they will benefit from low interest rates.
However, for many, this is not the case. Lenders such as HBOS, Nationwide, Abbey and HSBC all impose minimum tracker rates, which means borrowers' rates will either never go below a certain level (normally 3%) or the bank will stop reducing the rate if the Bank of England's base rate falls below a certain level (again, normally 3%)
Boulger explains: "Minimum tracker levels have only just emerged as an issue because previously the base rate wasn't expected to fall as low as economists now expect. However, banks that have these limits will stop passing on the benefit of lower interest rates at a certain point, which is bad news for many tracker borrowers."
|Lender||The base rate at which your tracker|
interest rate will freeze
And despite the base rate cut potentially making tracker rates look more attractive (in the short-term at least), new borrowers are already being squeezed with lenders such as Nationwide Building Society increasing the tracker rates.
Matthew Carter, divisional director for mortgages at Nationwide, says: "Like all lenders, we continually review our mortgage product range in light of competitor changes and market conditions. It is regrettable that we have to increase our tracker rates but we must take into account ongoing volatility in the wholesale markets and the high cost of funding."
The increase means that although current tracker borrowers will see their rates decrease by 0.5%, new customers opting for a two-year tracker up to 85% LTV will now pay 7.08%, up from 6.49%.
Halifax has also recently increased the cost of its new tracker deals.
Building societies have been named as the worst offenders for failing to pass on lower interest rate benefits to customers. According to moneysupermartket.com, only two building societies out of 59 have passed on the full base rate cut to those on their SVR mortgages.
Louise Cuming, head of mortgages at moneysupermarket.com, says: "Mutual organisations are supposed to put their members first, but they clearly haven't in the past week. People on SVRs are traditionally those who have struggled to get a mortgage, so they are in even greater need of some relief."
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.