Lenders say rate cut may not mean cheaper mortgages


Today’s Bank of England decision to cut base rate to 0.25 per cent will not necessarily mean cheaper mortgages, according to mortgage trade bodies.

Speaking at a press conference after announcing the cut to rates and a package of measures to boost the economy, Bank of England governor Mark Carney says the cut means banks “have no excuse” not to pass on the rate cut to their borrowers.

Banks including Barclays and Santander have already signalled that they will pass the cut onto their variable rate borrowers.

But industry experts say the base rate cut will not mean universally cheaper mortgages even for those on variable rate loans, in part due to many lenders using collars to restrict how far rates can drop.

The Council of Mortgage Lenders says it depends on individual lenders whether the rate cut will affect mortgage rates.

It says: “Around 50 per cent of borrowers are currently on fixed rates and will therefore see no immediate impact on their payments in any case.

“Of the remaining 4.9 million homeowners with a variable-rate mortgage, over 1.5 million (perhaps as many as 1.8 million) have a tracker rate mortgage – these borrowers may automatically see a rate reduction depending on their mortgage contract (but some will have a ‘collar’ or lower floor below which rates cannot fall).”

CML director general Paul Smee says: “Since the last change in official rate in March 2009, the average mortgage rate has already fallen from 3.8 per cent to 2.9 per cent.

“This confirms that Bank rate is not the only influence on mortgage pricing.”

The trade body adds the Bank has been urging borrowers to plan for the prospect of higher rates in the future.

Intermediary Mortgage Lenders Association executive director Peter Williams says: “In terms of mortgage rate pricing, lower for longer is generally good news, as this will support continued low rates and therefore affordability.

“However, it is important to note that a 0.25 per cent base rate fall would not immediately mean lower mortgage rates; the fixed-rate mortgage deals which are currently popular are priced from the swap curve – meaning lenders have already factored a potential reduction into their pricing.

“Essentially, the rates many high street customers pay already anticipate this.”

The Building Societies Association also says the Bank base rate cut may not affect overall mortgage rates.

It says: “Around 80 per cent of new lending is on fixed rates, about half of all outstanding mortgage balances.

“The pricing of mortgage products also depends on factors such as demand, funding costs, appetite to lend and competition.”

BSA chief economist Andrew Gall says: “As the cut in the Bank rate feeds through to influence other interest rates it will benefit some mortgage borrowers, though it will clearly not be welcomed by savers.”

However, others praise the move for giving variable-rate borrowers a better deal.

Society of Mortgage Professionals head of professional development Lee Travis says: “The Bank of England’s decision to cut the benchmark interest rate to 0.25 per cent will provide further stimulus to the UK mortgage sector and represents good news for borrowers – especially for those entering the market at a time when the base rate reaches a new record low.

“Existing mortgage holders on tracker rates will benefit from the reduction in their monthly repayments and for many it will be the first change to the official base rate since the commencement of their mortgage.”