Banks pushed to cut rates: Mortgage outlook
Thursday, 06 November 2008 02:53
The Bank of England's one and a half per cent interest rate cut must be passed on by banks and building societies to make any difference to the economy - but lenders now look like withdrawing tracker mortgages and rates on other deals may not be dropping.
"If the banks fail to pass on the base rate cut, it will be another slap in the face for mortgage customers," said Which? personal finance campaigns manager Doug Taylor.
"To add insult to injury, the banks will no doubt be falling over themselves in the rush to cut savings rates.
"All of the banks, particularly those who have benefited from taxpayers' money, should be passing on any base rate cuts in full to their customers."
Louise Bond, personal finance manager at uSwitch, is also less than positive about the outlook for mortgage borrowers.
"There is no enforcement in place to force mortgage lenders to pass cuts onto consumers," said.
"Since the emergency cut in October, only 50 per cent of all lenders have passed on any reduction to customers, whilst 82 per cent of lenders have not passed on the full one per cent reduction from the last three base rate cuts."
She added: "Despite a 3.75 per cent base rate reduction already this year, the average rate on a tracker is still 0.04 per cent higher than it was this time last year when it stood at 6.23 per cent."
Tracker mortgage savings
Borrowers who are already on trackers should see their monthly repayments drop.
On a 25-year repayment mortgage of 150,000, a two per cent cut reduces their monthly payments by £1666 to £711.
If they choose to overpay that extra money instead every month, the term of the mortgage would be reduced to less than 19 years.
However, not all tracker mortgage borrowers will see their mortgage rates drop or will see this as a final drop.
Ray Boulger at mortgage advisor John Charcol, explained some lenders have collars on their tracker mortgages, so they stop dropping when the base rate gets to a certain point.
"With some collars operating when Bank Rate falls below three per cent, the next cut in Bank rate will mean that some borrowers with tracker mortgages will not see the benefit of further cuts," he said.
"Indeed, a few borrowers with a tracker mortgage with some of the smaller building societies may not even get the full benefit from today's cut."
Tracker mortgages run out of steam
One immediate response from the Bank cut could well be mortgage lenders removing their tracker mortgages from the market - or repricing them to higher levels over the base rate.
"The surprise bank rate slashing will cause a lot of lenders to pull trackers, and you can bet the new tracker margins will be at least another one per cent higher," said Kate Tucker at mortgage broker mortgageforce.
She added Alliance and Leicester and Principality have already said they are giving until close of play today to get tracker deals in on the old margins.
Nationwide Building Society subsidiary the MortgageWorks has now pulled all tracker mortgages with immediate effect.
Abbey and Intelligent Finance have already increased their tracker mortgage rates this week.
Will the LIBOR drop?
Attention now turns to how the London interbank offered rate will react to the massive interest rate cut to three per cent.
"The three month Libor rate is the real problem for banks as it only started to decline in the last month and has since dropped to 5.68 per cent - this is still 2.68 per cent higher than the base rate," Ms Bond said.
"The fact that this rate has remained high is a clear indication that banks are just as fearful of lending to each other in this climate as they are to consumers."
Rob Clifford, chief executive of Mortgageforce, explained Libor took four weeks to fall the half per cent in response to October's cut.
"The speed and the size of this second wave may help spark some momentum to reduce the unnaturally large spread between bank rate and three-month LIBOR, however, this spread is unlikely to reduce to the lows of previous years.
"Lenders have to re-build their capital deposits to gain strength, so their costs are high. LIBOR stands at 5.68 per cent, quite a spread from Bank rate, and both lenders' standard variable rates and the new mortgages are currently priced to reflect that difference."
Adrian Coles, director-general of the Building Societies Association explains there are many pressures on lenders on how they set rates.
"Borrowers looking for new fixed rate deals or homeowners with mortgages linked to money market rates will not necessarily find their mortgage rates decreasing," he said.
"Building societies have a number of factors that they need to consider in determining mortgage rates, of which the Bank Rate is but one."
Others factors Mr Coles outlined included: flows of funds through societies; money market rates; competition in the savings and mortgage markets; and the need to maintain margins.
"Building societies will do all they can to ensure that the cost of mortgage borrowing is as low as possible. However, the Bank Rate is just one of the issues that they have to consider," he concluded.
What now for mortgage borrowers?
With fixed-rate mortgages with loan-to-value of up to 75 per cent falling slowly and now looking expensive compared to a three per cent base rate, tracker mortgages are looking the best option, claims Mr Boulger, as long as deals remain on the market.
"Trackers, ideally with a droplock option, remain the ideal mortgage product in today's market but it is increasingly difficult, especially for borrowers needing in excess of 75 per cent loan to value, to find one at a respectable margin over Bank Rate as lenders compete to see who can increase the margin over Bank Rate the most, or worse still withdraw their trackers completely," he said.
"Several have been withdrawn this week, with lenders waiting for today's rate decision before deciding how much to increase their trackers by."
He added: "With further Bank rate cuts expected over the next few months I still expect trackers to offer better value than fixed rates for the time being.
"For borrowers who want or need the security of a fixed rate there continues to be a good case for delaying an application until the lower swap rates which will follow today's cut are reflected in the rates on offer."
Mr Clifford at Mortgageforce says the current best buy for buyers with a 15 per cent deposit is Nationwide's first time buyer deal with only a £299 fee for a tracker rate of 5.98 per cent for three years (Cost for comparison 6.6% APR).
"Northern Rock is offering a market leading two-year fix for loans up to 75 per cent at 5.35 per cent with full flexibility to overpay and underpay, and free valuation and legal fees on remortgages (Cost for comparison is 7.4 per cent APR)," he added.
However, any mortgage deals are not likely to be around for long.
Andrew Hagger at Moneynet.co.uk said: "The magnitude of this rate reduction will have caught most institutions on the hop and there are probably high level meetings going on at bank and building society head offices across the country as we speak, working out how to re-price both their savings and mortgage products in light of this cut.
"Whenever there's a rate change, there will always be winners and losers, however many mortgage customers will feel that it is their turn to win and that this piece of welcome news is long overdue."
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