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Around half a million tracker mortgage customers with Halifax will benefit from today's rate cut after the bank said it would drop a controversial clause that stated it would stop cutting interest rates once the bank rate fell below 3%.
The small print in Halifax's mortgages gave it the option to increase the margin on tracker deals or change a negative margin to a positive one if interest rates fell too far. Some other mortgage lenders also have "collars" or "floors" on their deals that allow them to stop passing rate cuts on below a set level.
Halifax had come under pressure to change its terms because it did not include reference to the clause in its Key Facts Initiative (KFI) documents - the summary document given to borrowers when they take out a mortgage.
Earlier this week, the City watchdog the Financial Services Authority warned that lenders using a collar ran the risk of breaching disclosure requirements and unfair contract terms if such a clause had not been "consistently and prominently spelt out".
Halifax justified omitting mention of the collar in its KFI by saying that technically it did not carry a collar and insisted instead that if the base rate were to fall below 3% it had the right "to review the size of its customers' margins".
This did little to appease unhappy Halifax customers, particularly those who had no prior knowledge of the arbitrary collar. Jan Stette has had a tracker mortgage with the Halifax for two-and-a-half years and said he was "really shocked" to hear about the collar on his loan.
"I didn't at first believe it and couldn't even find it in my old mortgage documents: I had no idea that collar rates even existed. I'm not a lawyer but I can't see how banks can sell such deals without clearly informing customers about such a major aspect of it," he said.
The bank now says it will not stop its tracker rates from falling, even if the base rate plummets as low as 1% as some economists predict.
However, hundreds of thousands of tracker mortgage customers with other lenders will miss out on part or all of today's rate cut. Dozens of other lenders impose collars that were written into the KFI when the mortgage was sold.
Nationwide, one of the UK's biggest lenders, has a collar of 2.75% on its tracker deal. It won't say how many borrowers are on such a mortgage, but anyone who is will only see their rate fall by 0.25% when today's rate change kicks in in January.
"The floor [collar] is clearly outlined in borrowers' KFI and in our terms and conditions, so from our point of view we are entirely justified in enforcing it," said a spokesperson.
Anyone who takes out a new Nationwide mortgage will be given a collar of 1%. Other lenders have even tougher collars of up to 4.5% - borrowers on those deals will already have missed out on previous cuts.
Halifax said it was reviewing its SVR in light of the base rate cut.
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