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Banks and building societies have been warned that they could be in hot water if they use contract small print to avoid passing on tomorrow's expected interest rate cut to customers on tracker mortgages. The Financial Services Authority yesterday waded into the row over the "collars" or "floors" that some lenders have in their terms and conditions, which allow them not to pass on rate cuts, even if the contract states that the mortgage is tied to the Bank of England base rate.
Nationwide building society has indicated that once the base rate falls below 2.75% it will not pass on further cuts to borrowers on tracker deals taken out between December 2004 and last weekend. Halifax has an option not to pass on any cuts below 3%.
Speaking at the Council of Mortgage Lenders' annual conference, Jon Pain, the FSA's retail markets managing director, said that while tracker deal interest rate floors could be a legitimate term of a mortgage, "this can only be if it is clear and unambiguous to the consumer, and is consistently and prominently spelt out in the initial key facts illustration and offer document throughout the sales process.
"If it is not, [lenders] run the real risk of breaching our disclosure requirements and having an unfair contract term you can't enforce."
Last month the Bank of England's base rate was cut from 4.5% to 3%.
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