Borrowers whose initial mortgage deal is about to expire could reap more benefit from recent interest rate cuts than new buyers or those still on cheap tracker rates, as lenders have made sharp cuts to their standard variable rates (SVRs).
In the past, when borrowers came to the end of a short-term mortgage deal, they often suffered a rise in costs as they switched to the more expensive SVR. But the recent drop in the base rate has meant that, in many cases, SVRs are now considerably cheaper than the new rates offered by lenders and can even be lower than expiring two or three-year deals.
“Thousands of borrowers coming off two or three-year deals over the next few months will automatically be switched on to a cheaper rate,” said Ray Boulger at John Charcol, the broker.
Most lenders have reduced their SVRs by at least two percentage points in recent months. The best new two-year fixed rates have fallen by around half that amount.
The base rate has now fallen so far that large numbers of borrowers on tracker mortgages will not see any benefit of this week’s reduction or any further cuts.
Nationwide and Skipton Building Society passed on this week’s half-point rate cut to their SVRs. But customers with existing tracker mortgages did not see the benefit as these lenders have enforced “collars”, which prevent tracker rates falling below a certain level. However, both lenders have clauses that ensure their SVRs do not rise above a certain margin over base rate.
Nationwide and Lloyds TSB, which also passed on the rate cut in full, now have SVRs of 3.5 per cent, while HSBC, Royal Bank of Scotland and Halifax charge 4.5 per cent or less. The cheapest two-year fixed rates are 4-4.5 per cent but these may carry large fees and are only available for borrowers with large deposits.
There is no sign of banks relaxing lending criteria. New borrowers still need deposits of at least 40 per cent to secure the best rates. No tracker deals are available for borrowers with deposits of less than 20 per cent. Fixed rates jump to 5 or 6 per cent on loans with smaller deposits.
Estate agents said until the availability of mortgages improved, property prices would not stabilise. Knight Frank believed property prices would fall a further 10 per cent this year. Brokers said alternative measures, such as government loan guarantees or the removal of “toxic” assets from banks’ books, were urgently needed to stimulate lending.
