In line with other historic events this week (inc Barack Obama becoming US President) the Bank of England has today slashed interest rates by 1.5%.
This took analysts by surprise who were expecting a 0.5% rate cut or possibly 0.75%. Borrowing costs are now at their lowest levels since 1955 and the 1.5% rate reduction was the biggest since a 2% rate cut in March 1981.
There are some four million homeowners who have tracker rate mortgages, all of whom are hoping to get immediate benefit with a reduction in their monthly mortgage payments.
With the surprise size of this interest cut there must be good scope for mortgage lenders, the banks and building societies, to pass on the lower interest rates to their customers. This question of passing on rate reductions though has created much debate, not least as a result of Abbey and Halifax raising some of their tracker mortgage rates recently. It is also of concern that following the Ocotber rate decrease, a significant percentage of lenders that have standard variable rate (SVR) mortgages have not passed it on. The Prime Minister, Gordon Brown has stated ‘We want the banks and building societies to pass on the interest rate cuts to their mortgage holders.’ The big question is will they?
Lenders are of course subject to their own wholesale funding costs which they will argue are still high in relation to the Bank of England base rate, much higher than they were before the recent bank credit issues. Until the funding costs come down then the challenge for the lenders is to ensure they provide their loans at a rate that their cost of borrowing makes commercially viable.
Already Michael Coogan, Council of Mortgage Lenders, has said that given the size of the reduction then lenders will take their time and not rush to announce any changes to the cost of their variable rate mortgages.
Some lenders have included a ‘collar’ on their tracker mortgages which means there is a rate below which their mortgage rates will not follow the base rate. This varies but for example HBOS has set this ‘collar’ at 3% and Nationwide at 2.75%.
At the time of writing, Lloyds TSB has confirmed it will pass on the full cut to its SVR mortgage customers. This means SVR mortgage customers of both Lloyds TSB and Cheltenham & Gloucester will benefit from a 6.5% to 5% reduction from November 1.
Let’s hope the other lenders soon follow suit and give us, the weary homeowners, some good news. After all we need it!