Hundreds of thousands of homeowners hoping to see a major reduction in their mortgage payments in the New Year following the reduction in the Bank of England base rate to 2 per cent, may be disappointed, as not all the banks that have taken a government cash injection are passing on the rate cut in full.
While Lloyds TSB was one the first of the big banks to confirm that it will cut rates on existing variable and tracker-rate mortgages by the full 1 per cent, Halifax – Britain’s biggest mortgage lender, whose parent HBOS has taken a multi-million pound cash injection from the government – said its standard variable rate will fall by only 0.25 per cent to 4.75 per cent.
Lloyds announced that, from the start of January, the SVR on mortgages issued under its Cheltenham & Gloucester brand will drop by the full 1 per cent to 4 per cent. Borrowers with tracker rates will also receive the full benefit of the base rate cut, as as Lloyds does not impose a “collar” or a minimum rate it can charge.
Halifax has also confirmed that it will no longer impose its own 3 per cent collar on tracker rates. But it is still not passing on the full rate cut to customers on its SVR. It said this decision “strikes an appropriate balance between the group and its customers at a time when interest rates are historically very low and the economic outlook is difficult.”
By contrast, HSBC, which has not sought capital from the government, is passing on the full 1 per cent cut to tracker and SVR customers. Mortgages issued under its First Direct brand will now charge an SVR of just 3.69 per cent.
Rates on long-term fixed-rate mortgages are also coming down. A 4.99 per cent ten-year fixed rate deal with a deposit of 40 per cent will now be offered by both Lloyds and C&G.
“As swap rates are set with future anticipated base rate cuts priced in, there is speculation that the market is starting to bottom out,” said Stephen Noakes, C&G’s marketing director. “Now is a good time for homeowners to take advantage of the low-rate environment by locking and enjoying the security of a competitive rate for the next decade.”
But while the reduction in the base rate is good news for existing homeowners, new buyers may face difficulty in the coming months as banks are likely to raise rates and put more restrictions on the range of products available to them. In response to Thursday’s news, Lloyds TSB, Alliance & Leicester and Abbey moved to withdraw their ranges of tracker-rate products available to new customers, which suggests they are likely to re-price them.
Also, those borrowers who have tracker rate mortgages with Nationwide Building Society and Skipton Building Society are not likely to benefit from the full rate cut as these providers set “collars”. For example, Nationwide will not pass on any cuts made if the base rate drops to below 2.99 per cent while Skipton Building Society will not pass them along if the rate falls below 3 per cent.
“Banks have to get their money back somewhere. So for borrowers looking for new deals, the interest rate cut is not particularly helpful as the rates available to them are likely to be higher than they were,” said Louise Cumming, head of mortgages at moneysupermarket.com, the research group.
Brokers object because collars are often hidden in the small print of mortgage contracts, so borrowers may not be aware that they will not benefit from heavy cuts to the interest rate. Most lenders have this clause, although details vary between providers.
Savers are also not rejoicing about Thursday’s news as in most cases, the rates they receive on their bank accounts, which have fallen in recent weeks following last month’s 1.5 per cent cut, will be reduced further from the first of January. Advisers are encouraging clients to lock into deals quickly as they are likely to be either withdrawn or see their terms changed during the Christmas period. Manchester Building Society still offers a rate of 5.51 per cent on its premier guarantee account while ICICI Bank offers a rate of 5.5 per cent on its HiSave savings account.
