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Thousands of homeowners with tracker mortgages will find themselves paying no interest if the Bank of England tomorrow cuts borrowing costs to their lowest level ever. Others will be paying just a nominal sum for their home loan – perhaps £60 a month compared to the £750-£800 they were handing over late last summer – if as widely predicted the Bank slashes rates from 1.5% to 1%.
It has been claimed that some mortgage customers could end up being owed money by their bank because they are on deals where their rate is set to sink below 0% into "negative interest" territory. There have even been suggestions this issue could be the subject of a legal challenge, but the Financial Services Authority (FSA) yesterday appeared to dash hopes that these people will be entitled to an interest payment from their lender.
The most fortunate homeowners are those whose deals track below the Bank's base rate. The luckiest of all are the 1,500 people who took out a Cheltenham & Gloucester tracker mortgage on sale during the summer of 2007, where the rate paid was set at 1.01 points below base rate. Ray Boulger of mortgage broker John Charcol said in theory these people would be owed money if the base rate was cut to 1%. However, C&G said it would not allow the interest rate to go below 0%, and added it was comfortable that its mortgage contracts stated that interest was only payable by the customer.
At the moment C&G's systems do not recognise a 0% interest rate, and as a result any tracker customer whose rate falls to 0% will, "as a temporary measure," be charged a nominal rate of 0.001%, which equates to a monthly bill of 8p for someone with a £100,000 interest-only mortgage.
"Any 0.001% interest payments made will be treated as overpayments or, alternatively, customers can request a refund once our systems have been updated," said a spokeswoman for the lender, which is part of the new Lloyds Banking Group in which the government holds a 44% stake. She added that no one had approached the bank about a possible legal challenge to its stance.
The FSA has waded into the debate, saying it all depended what was stated in people's contracts. But it added: "We have looked at some [contracts] and our judgement is that the obligation of paying interest is a one-way obligation. Interest is paid by borrowers to lenders. It doesn't get to the point where a lender has to pay 'interest' to a borrower. Once it has reached [zero], a borrower can't change his status to being a lender and vice versa." The spokesman said a borrower "is always a borrower" and paid interest, though the amount of interest he or she pays might be very low.
Gill Greenwell, a lawyer who has worked in the financial services industry drawing up product contracts, said: "The terms and conditions are written for the lender, not the consumer. They entitle the lender to charge interest on a loan. I think you would actually have to have something written into the terms and conditions to give the borrower the right to charge interest. Whether you could imply that [from the existing contract] would be a very interesting but hard argument to run."
Meanwhile, many of the estimated 4 million people on tracker mortgage deals look set to celebrate yet another sharp fall in their monthly payments. Most people would probably expect someone who advises on mortgages to have picked a good home loan deal for themselves, and Elliot Nathan fits that bill: he works for broker firm John Charcol and has a Co-operative Bank interest-only tracker mortgage on which he pays base rate minus 0.66% for two years. That means his pay rate could fall to 0.34% tomorrow, which would slash his monthly bill to £63. Five months ago Nathan's monthly payment stood at £790, demonstrating just how far, and fast, interest rates have fallen.
Nathan, 35, who lives in Elstree, Hertfordshire, phoned his lender to ask what would happen if the base rate kept falling and he ended up in negative interest territory. "They told me it will be capped at zero," he said. The bank's terms and conditions apparently allow it to cap the mortgage in extreme circumstances.
• Unsure whether to keep your fixed-rate mortgage or move to a cheaper deal? Our calculator will show you what rate you need to achieve to make a switch worthwhile
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