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Interest rate cut by 1.5%
Interest rates have been cut by 150 basis points today bringing the official Bank of England base rate down from 4.5% to 3%.
This is the second month in a row that the central bank's Monetary Policy Committee (MPC) has chopped rates, with an emergency 0.5% cut unveiled in October, a day earlier than expected.
Today's cut is a further sign that the MPC is now focused on tackling the economic downturn by reducing interest rates. In previous months, the Committee was more intent on getting a grip on inflation, which has risen well above its 2% target, currently sitting at 5.2%.
The likelihood that the UK will enter into a recession next year means the Bank of England, along with the government, must do all it can to help households and businesses - including lower interest rates.
But despite today's cut, there are concerns that consumers might not benefit.
Borrowers have been warned not to expect mortgage rates to come down despite signs that interbank lending is getting cheaper.
According to online mortgage broker mform, the interest rates at which banks lend money to each other - known as Libor - have dropped significantly over the past month, potentially enabling banks to pass on savings to new customers.
Rates on two, three and five-year money, which is used by mortgage lenders to fund fixed-rate deals, have fallen by as much as 0.6% since the start of October. Two-year fixed-rate cash has reduced from 4.76% to 4.32%, three-year cash from 4.85% to 4.27% and five-year from 4.96% to 4.56%.
“Falls in the money market rates of up to 0.6% is a healthy sign of good news on the way for borrowers who need to remortgage and also for new borrowers,” says Francis Ghiloni, marketing and business development director at mform.
Libor has remained stubbornly high in recent months, despite the Bank of England cutting interest rates to 4.50% last month. The average two-year fixed-rate deal stands at 5.19%, but borrowers looking for the security of a five-year fixed-rate deal face rates of 5.62%.
Despite the recent falls, David Hollingworth, a mortgage broker at London & Country, warns that mortgage lenders are still very cautious about passing cuts on.
“While there are signs that the cost of mortgage funding is falling, lenders are in no rush to pass on the savings to borrowers,” he explains. “There have been small moves in fixed rates by lenders such as Nationwide and Abbey, but profit margins on tracker products, for example, are still increasing.”
And although the MPC did reduce interest rates by 1.5% in November, Hollingworth urges caution.
“Libor will start to come down but it will be a very slow process because lenders are simply not able to lend on any great volume,” he says. “It would be a brave move for any lender to launch a cheap and attractive product because they would face an avalanche of business.”
Meanwhile, existing customers on lenders’ standard variable rates have been warned not to expect to see their rates fall even if the Bank of England does slash the base rate.
David Hodgkinson, head of banking giant HSBC, recently told customers that it cannot guarantee to pass on rate cuts. Although the bank has said it will pass on November's 150 basis point cut to borrowers, it is not clear what action it will take in the future if/when rates are cut again
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
Halifax 3%
Nationwide 2.75%
Skipton BS 3%
Yorkshire 3%
Source: johncharcol.co.uk
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."
Interest rates have been cut by 150 basis points today bringing the official Bank of England base rate down from 4.5% to 3%.
This is the second month in a row that the central bank's Monetary Policy Committee (MPC) has chopped rates, with an emergency 0.5% cut unveiled in October, a day earlier than expected.
Today's cut is a further sign that the MPC is now focused on tackling the economic downturn by reducing interest rates. In previous months, the Committee was more intent on getting a grip on inflation, which has risen well above its 2% target, currently sitting at 5.2%.
The likelihood that the UK will enter into a recession next year means the Bank of England, along with the government, must do all it can to help households and businesses - including lower interest rates.
But despite today's cut, there are concerns that consumers might not benefit.
Borrowers have been warned not to expect mortgage rates to come down despite signs that interbank lending is getting cheaper.
According to online mortgage broker mform, the interest rates at which banks lend money to each other - known as Libor - have dropped significantly over the past month, potentially enabling banks to pass on savings to new customers.
Rates on two, three and five-year money, which is used by mortgage lenders to fund fixed-rate deals, have fallen by as much as 0.6% since the start of October. Two-year fixed-rate cash has reduced from 4.76% to 4.32%, three-year cash from 4.85% to 4.27% and five-year from 4.96% to 4.56%.
“Falls in the money market rates of up to 0.6% is a healthy sign of good news on the way for borrowers who need to remortgage and also for new borrowers,” says Francis Ghiloni, marketing and business development director at mform.
Libor has remained stubbornly high in recent months, despite the Bank of England cutting interest rates to 4.50% last month. The average two-year fixed-rate deal stands at 5.19%, but borrowers looking for the security of a five-year fixed-rate deal face rates of 5.62%.
Despite the recent falls, David Hollingworth, a mortgage broker at London & Country, warns that mortgage lenders are still very cautious about passing cuts on.
“While there are signs that the cost of mortgage funding is falling, lenders are in no rush to pass on the savings to borrowers,” he explains. “There have been small moves in fixed rates by lenders such as Nationwide and Abbey, but profit margins on tracker products, for example, are still increasing.”
And although the MPC did reduce interest rates by 1.5% in November, Hollingworth urges caution.
“Libor will start to come down but it will be a very slow process because lenders are simply not able to lend on any great volume,” he says. “It would be a brave move for any lender to launch a cheap and attractive product because they would face an avalanche of business.”
Meanwhile, existing customers on lenders’ standard variable rates have been warned not to expect to see their rates fall even if the Bank of England does slash the base rate.
David Hodgkinson, head of banking giant HSBC, recently told customers that it cannot guarantee to pass on rate cuts. Although the bank has said it will pass on November's 150 basis point cut to borrowers, it is not clear what action it will take in the future if/when rates are cut again
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
Halifax 3%
Nationwide 2.75%
Skipton BS 3%
Yorkshire 3%
Source: johncharcol.co.uk
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."
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