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At least half a million tracker mortgage customers may not see their repayments fall in line with this week's expected interest rate cut, it was predicted today.
That figure could more than double if the UK's largest lender, Halifax, implements a clause in its home loans allowing it to change borrowers' rates.
The Bank of England's monetary policy committee (MPC) is widely expected to reduce the base rate by between 0.5% and 1% when it announces the result of its two-day meeting tomorrow. But clauses in some tracker mortgages will mean lenders no longer have to pass on the cut to their customers, while those on standard variable rate (SVR) deals are also unlikely to benefit from the full reduction.
Despite the fact that tracker deals automatically move up and down in line with the base rate, some have so-called floors or collars which state that lenders will stop passing on rate cuts once the base rate falls below a certain level.
On Nationwide deals a collar kicks in when official interest rates fall below 2.75%, while on a Skipton or Yorkshire building society tracker the cut off point is 3%.
Ray Boulger, senior technical manager at mortgage broker John Charcol, said up to 1.2 million people - a sizeable proportion of the estimated 3.9 million who have tracker deals - may not see the full reduction passed on to them.
He said up to 600,000 people had tracker mortgages with lenders such as Nationwide and Skipton, while up to a further 600,000 have a tracker deal with Halifax, which may choose to exercise its option not to pass on the rate cut in full.
Halifax
The small print in Halifax's mortgage gives it the option not to pass on all or any cut once the base rate falls below 3%. It tells customers: "We can also change the tracker margin to your disadvantage, but only at a time when the tracker base rate is less than 3% per year.
"By 'to your disadvantage' we mean increasing the tracker margin where it is positive or zero, reducing the tracker margin where it is negative, or changing a negative tracker margin to a positive one."
However, comments made yesterday by a representative of the City watchdog, the Financial Services Authority (FSA), suggest the bank could be in trouble if it tries to implement the clause.
Jon Pain, the FSA's retail markets managing director, told the Council of Mortgage Lenders annual conference that while tracker interest rate collars 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".
A spokesman for the FSA said it would not comment on individual companies, but it seems likely Halifax will be under pressure to pass on any reduction in full.
If it doesn't, Boulger said it could face a legal challenge from borrowers. "I had a call last week from one borrower with a large Halifax lifetime tracker mortgage who said he would do just that," he said.
Standard variable rates
Borrowers on SVRs are also unlikely to benefit from the full reduction. Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, is the only major lender which links its SVR to the Bank base rate.
Its terms and conditions pledge that its SVR will never be more than 2% above the base rate, which means it could fall as low as 4% if the MPC does opt for a full 1% cut.
Last month, a number of major lenders were quick to reduce their SVR by the full 1.5% after coming under pressure from the government, but many others only passed on smaller cuts.
Overall, 87 out of 95 lenders with an SVR passed on some of the reduction, but 57 did not pass it on in full, with some only reducing their rates by 0.25%. The Woolwich, Barclays' lending arm, has not passed on anything.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "If we see a 1% cut to [an overall rate of] 2%, it will be very, very difficult for lenders to pass that on.
"They have to have an eye on profitability and 2008 has been about lenders wanting to get profit rather than volume lending."
Boulger agreed, saying that if rates were cut by 1% he would expect lenders to pass on between 0.25% to 0.5% to SVR customers, unless the government puts pressure on the major lenders to pass on the cut in full again.
If the MPC cuts interest rates by 0.5% and lenders pass on the reduction in full it would save borrowers with a typical £150,000 mortgage around £43 a month, while a 1% reduction would reduce monthly repayments by £85.
- Mortgages
- Property
- Borrowing & debt
- Banks and building societies
- Housing market
- Interest rates
- Interest rates
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