Banks hold back on passing on reduction

[Legal Beagles]

Savers were left in the dark yesterday after interest rates were cut to record lows. While banks and building societies raced to be the first to announce mortgage cuts, their savers, who vastly outnumber borrowers, were given scant information about where rates are heading.
Spanish-owned bank Abbey limited itself to a brief "savings rates are also under review" statement, but even that was more expansive than others.
In common with many competitors, Abbey did not react to December's 1% cut until 1 January. It then listed a complex mix of rate decreases - some as low as 0.15%, others far higher. But what is clear is that banks will cut rates again, probably from the start of next month.
Figures from comparison website uswitch earlier this week showed that instant access savings accounts now pay about 1.5% - less after income tax is deducted. But some accounts are already close to zero. Government-financed banks such as Halifax and Royal Bank of Scotland are among those with accounts paying interest of as little as 0.1%.
Banks must now decide how to pass on the latest cut.
James Caldwell of fairinvestment.co.uk said: "Today's interest rate cut comes as no surprise. However, savers and pensioners are inevitably going to suffer as rates edge even closer to zero. This will be another blow to those using interest from investments to supplement incomes."
Some investors are looking outside traditional savings accounts. "For savers, the cut means very meagre returns on deposits and this could flush out some interest in returning to stock and bond markets," said Jason Hollands at investment group F&C. "If you are prepared for volatility ... equities offer a decent yield, with the potential of long term capital growth."
"If you need access to your money within two to three years, you have to take the interest rate hit and live with low rates. But if you can wait, buying into shares could work," said Mick Gilligan at stockbrokers Killik & Co.
"The blue chip Footsie index yields 5.9% - and that's tax-free to basic rate taxpayers. And good quality corporate bond funds pay about 6%."

• Interest rates
• Interest rates
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• Banks and building societies
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[Legal Beagles]

Anger as lenders drag their feet on passing cut to homeowners


Many of Britain's leading banks looked on a collision course with the government last night when they said merely that they were keeping their main lending rates "under review" after the Bank of England cut the base rate to an all-time low of 1.5%.
While the Nationwide, HSBC and Lloyds-TSB pledged to match Threadneedle Street's half-point cut - which took interest rates to their lowest since the Bank was established in 1694 - Halifax, the country's largest mortgage lender, said it would pass the full cut on to its tracker customers but would cut its standard variable rate by only a quarter of a point.
Other top banks including Barclays and Royal Bank of Scotland/Natwest, the latter now 58% owned by the taxpayer, declined to follow suit for now.
As the Bank's monetary policy committee has cut rates from 5% in October in several stages, banks have tried to widen their lending margins to improve their battered balance sheets. This has angered ministers, who want homeowners to benefit from cheaper base rates and spend more to boost the economy.
The Chief Secretary to the Treasury, Yvette Cooper, said yesterday: "Clearly people are affected differently, depending on the kind of mortgage that they've got. But the point here is that the banks themselves are benefiting from the cut in the Bank of England base rate, and we want to see those benefits passed on.
"There are different ways for the banks to do that, including through passing on mortgage rate reductions, but also through looking at what more they could do to benefit savers, or looking at what more they can do to increase the volume of lending."
Many people who took out tracker mortgages before the recent spate of rate cuts will benefit as the rates charged on them are tied to the Bank rate. But new borrowers or those remortgaging have found much less competitive rates are on offer, while some borrowers are facing "collars" on their mortgages - a downward limit on how far the rate can fall.
HSBC upped its tracker rate for new borrowers on Wednesday, by 0.31%, apparently to pre-empt the predicted base rate cut from the Bank of England.
Yorkshire building society has a collar of 3% on its tracker mortgages, but admitted yesterday that some borrowers may benefit from this month's cut after all. The society said details of the collar had been left out of some customers' key facts illustrations and it was examining terms and conditions on those loans to see if the collar could be imposed. Where no collar is mentioned, borrowers will see their rates fall in line with yesterday's rate cut, it added.
Halifax was forced last month, following the intervention of the Financial Services Authority, to drop a clause in its mortgage contracts allowing it to impose a floor on interest rates. Nationwide had already warned 200,000 of its tracker rate mortgage customers that they would not see further falls in interest rates below 2%.
Ray Boulger, mortgage expert at adviser John Charcol, said: "With most collars on tracker mortgages now operating I estimate that 275,000-300,000 out of the approximately 4 million borrowers with a tracker mortgage will not benefit from today's Bank rate cut, or indeed any further cuts." Tracker rates account for about 40% of all mortgages.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, was gloomy about the rate cut helping the housing market or wider economy. "The risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate," he said. "With many first-time buyers unable to find [finance] and existing owner-occupiers who need to move similarly blighted, the time has come for the government to take action to restore an orderly property market."
What to do next

First-time buyers David Hollingworth of mortgage broker London & Country says it is possible to get a mortgage with a 10% deposit but the cost will be high: "You can easily be looking at the high end of 6% on fixed rates at a 90% loan-to-value ratio, and even then you will have to be a pretty sparkling borrower."
Borrowers with an uncompetitive fixed-rate mortgage Hollingworth says: "You can always look at moving, but you have to work out the cost of leaving your current deal. Repayment charges can be as much as 3% of the outstanding mortgage." London & Country offers a free mortgage calculator that will do the number crunching, 403 Access Forbidden. For those seeking a new fixed-rate mortgage there is some good news. These have been dropping in price: look at Mansfield building society.
Borrowers with little or no equity in their homes Your best option may be to move on to your lender's standard variable rate when your current deal comes to an end.
Borrowers on tracker mortgages who now have spare cash You could reduce the length of your mortgage and the amount it costs you by thousands of pounds if you use the money you are saving now through lower interest rates to reduce your mortgage. Most lenders will allow you to pay off some of your mortgage early without penalty, even if you are on a special deal.
Jill Insley and Harriet Meyer
The fixed rate holder: Happy to pay for a sense of security

With a family to consider, Amanda Nelson and Michael Essinger, 41 and 44 respectively, were happy to pick a "decent" fixed mortgage rate to secure their monthly repayments.
They pay £643 a month for their two-year, £128,000 part interest-only and part repayment mortgage with C&G, fixed at 5.09%.
When their previous deal expired in December, they chose to remortgage to continue paying off the loan on their four-bed house, valued at around £275,000, where they live with their children Rachel, 13, and Sam, 12, in Hempnall, a village near Norwich, Norfolk.
Nelson, a human resources consultant, said: "Previously, we had a rate of 4.75% for two years, but when this deal was nearing an end we chose to review it through broker London & Country, and are happy with the result. There were other decent deals available, but they had higher fees, and for this one we paid a £550 arrangement fee and £99 booking fee, which wasn't as high as others."
She reckons it is "swings and roundabouts" when choosing a rate in the current climate, and added: "While people on trackers are paying less as rates fall to historically low levels,
this may not continue and we needed the security of fixed monthly repayments, as things could change in the future."
Harriet Meyer
The tracker holder: Payments cut from £537 to £145 a month

Russell Gibbons, 37, is "delighted" that his mortgage repayments will fall by £48 a month following the cut in the base rate.
The sales supervisor, from Bristol, took out a two-year tracker pegged at 0.05% above the Bank of England base rate with Britannia building society in January last year, and is now reaping the benefits following a series of swingeing interest rate cuts.
"I have already benefited from previous cuts, and am very chuffed that I chose this deal rather than a fixed rate," he said.
When he first took out the mortgage he was paying an interest rate of 5.55% and monthly payments of £537 for his £116,000 interest-only mortgage on a three-bedroom house. But this has dropped to £193 a month, and will fall again to £145 next month once his lender passes on the rate cut. Following the previous percentage point cut in December, he saw his repayments cut by £96, and plans to use the extra money wisely.
He said: "I will probably save more into my Isa and also pay lump sums off the mortgage with the extra money, so I can benefit from the double whammy of more savings and a better mortgage rate - great news in the current environment.
"And I have another year on the rate so will hopefully be able to take advantage of further falls."
Harriet Meyer

• Interest rates
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• Banking
• Banks and building societies
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