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Banks and building societies were today warned they could find themselves in hot water if they use small print terms to avoid passing on this week's likely interest rate cut to their tracker mortgage customers.
The Financial Services Authority has waded into the row over the "collars" or "floors" that some mortgage lenders have in their terms and conditions, which allow them not to pass on rate cuts, even if the contract says the loan is tied to the Bank of England base rate.
Many holders of tracker home loans are looking forward to another sizeable reduction in their monthly costs if the Bank cuts rates on Thursday. Some economists are predicting a cut of a full percentage point, which would take the main rate down to 2%.
However, some lenders have small print in their contracts which allows them to set a minimum rate for customers.
Nationwide building society has indicated that once the base rate hits 2.75% it will not pass on any further cuts to borrowers, while Halifax has an option not to pass on any cuts below 3%, but both would be under pressure to do so. The restriction means a borrower with a Nationwide mortgage tracking 0.5% above the base rate will never see their pay rate fall below 3.25%, even if interest rates continue to fall.
Speaking today at the Council of Mortgage Lenders annual conference, Jon Pain, the FSA's retail markets managing director, said that while tracker interest rate floors could be a legitimate term of a mortgage, "it can only be if it is clear and unambiguous to the consumer, and is consistently and prominently spelt out in the initial KFI [key facts illustration] and offer document throughout the sales process".
He added: "If it is not [lenders] run the real risk of both breaching our disclosure requirements and having an unfair contract term you cannot enforce."
Pain said he was well aware of the potential risks some lenders faced in a very low interest rate environment. "But the solution cannot be to introduce contract terms that don't exist or are unenforceable," he added.
Yesterday, Nationwide launched a tracker deal with a collar of 1%, allowing new borrowers to benefit from further rate cuts. However, the rate on the mortgage is pegged 1.99% above the base rate.
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