Having endured five interest rate increases between August 2006 and July last year, an interest rate cut should bring welcome relief for those with variable rate mortgages. Millions stand to lose out though, as lenders take the opportunity to widen their margins and not pass the rate reduction on in full.
The Monetary Policy Committee (MPC) voted to cut Bank rate from 5.5% to 5.25% on Thursday. Anyone with a tracker mortgage is guaranteed to see their monthly payments fall - a quarter-point reduction knocks £31 a month off the repayments of a £150,000 interest only loan. Most borrowers will not see their repayments change until next month, but given that we had another 0.25 point interest rate reduction in December, those on tracker loans stand to pay £744 a year less on their mortgage.
However, those with loans linked to their lender's standard variable rate (SVR) may not be so fortunate. Any changes to an SVR are at the lender's discretion. Traditionally, mortgage providers have tended to increase and decrease their SVR in line with changes to the official Bank rate, although there are always a few that do not mirror the MPC decision. A number of lenders, including Halifax, Nationwide, Woolwich, HSBC and First Direct have been quick off the mark to announce that their rate will go down by 0.25 points. However, the ongoing financial crisis is likely to result in a higher-than-normal proportion of lenders deciding not to reduce their SVR by the full quarter-point.
Around 20% failed to pass on December's rate cut in full and this included some big names. Intelligent Finance, which is owned by Halifax Bank of Scotland, left its SVR unchanged at 7.25%, while Northern Rock only passed on a 0.15 percentage point reduction and Alliance & Leicester and Scottish Widows Bank reduced their rate by just 0.2 points. The number of mortgage providers short-changing customers in this way is expected to be even higher this time around because many lenders are still facing funding problems because of the credit crunch.
This will be of little comfort to those with loans linked to their lender's SVR - when you take a tracker or discount you accept that your payments will rise when interest rates go up. But on the flip side, you expect to benefit from lower payments if interest rates fall.
Anyone looking for a mortgage should therefore be mindful of the fact that discounts are not guaranteed to follow Bank rate changes. Most economists think we will have at least one more interest rate cut this year so you might think a variable rate loan is more attractive than a fixed rate at the moment. But check whether it tracks Bank rate, or is a discount linked to the SVR.
If you want to know that you will definitely benefit in full from future rate falls, then Co-operative Bank has the best two year tracker. The rate is 5.24% and the deal is available for loans up to 90% of the property's value. There is a £999 arrangement fee although those remortgaging receive a free valuation and free legal work.
Alternatively, if you would prefer a lifetime tracker, HSBC is offering a rate of 5.48%. The fee is £599 and there are no redemption penalties at any time. Like the Co-op deal, this product is also available for loans up to 90% of the property's value.
Even though interest rates look as though they will fall further, it could still be worth considering a fixed rate mortgage. First Direct has a great deal at 4.75% that is fixed for two-years - we would need another two quarter point reductions in Bank rate for the rate on Co-op's two-year tracker to be lower. However, the First Direct deal has a fee of £1,498, borrowers must have a deposit of at least 20% and the maximum loan size is £300,000.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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