Rate Cut Winners And Losers

Are any lenders justified in not passing on the 1% Base Rate cut?

Yesterday the Bank of England cut its Base Rate to 2%, a drop of 1% that is aimed at stimulating consumer spending and boosting the flagging economy.

Whether it will be enough to get people spending is anyone's guess, but what will certainly impact on purses and wallets is whether or not mortgage lenders pass on the cut to borrowers.

Only a handful of lenders have yet announced their response to the rate cut and how it will impact on their standard variable rates - most are `reviewing the rates', which means they are waiting to see what rivals do first.

With Brown and Darling keeping their beady eyes on them, lenders have enormous political as well as financial and market pressures to contend with.

Who has cut what?

Full marks to Lloyds TSB/C&G which announced yesterday it would pass on the whole cut, making its SVR an extremely low 4%.

HSBC also announced it would pass on the full cut, with its rate dropping to 4.44%.

Barclays/Woolwich dropped its SVR by more than the 1% - 1.15% to 5.49%. The lender also announced that the Barclays Bank Base Rate (which all of Woolwich trackers are pegged to instead of Base Rate, has also dropped to 2%)

But Halifax, Nationwide and RBS have elected to pass on only a portion of the 1% base rate cut.

• RBS/NatWest has passed on 0.75%, taking its SVR to 4.44%
• Nationwide is passing on 0.69%, taking its SVR (or Base Mortgage Rate as it calls it) to 4%
• And Halifax is only passing on 0.25% of the cut, taking its SVR to 4.75%

Abbey and Alliance & Leicester, both owned by Santander, had yet to announce their decision at the time of writing.

But are lenders justified in extending their margins at a time when lower rate cuts could benefit millions of borrowers?

Longer term outlook

Firstly, it isn't fair to judge mortgage lenders solely on how they have responded to this week's cut. The Bank of England has chopped rates for three consecutive months and it is more even-handed to look at how they have moved their own SVR over the entire period, not just in the last two days.

For example, HSBC may have passed on the full cut yesterday but last month it only passed on 0.81% of the 1.5% cut and in October it didn't pass on any of the 0.5% decrease. So it has only passed on 1.8% of the 3% cuts in the last three months, taking its rate to 4.44%.

While Nationwide may have only passed on 0.69% this time, it cut by 1.5% in November and by 0.3% in October, meaning that in the last three months it has passed on 2.49% of the 3% cut, and now has a lower SVR than HSBC at 4%.

And even Halifax's small cut this month of 0.25% takes its total SVR cut over the last three months to 2.25% out of the 3% cut - still more than HSBC.

Lloyds TSB/C&G get the gold star for passing on all 3% in the last three months. The lender's SVR is now the lowest available, on a par with Nationwide at 4%.

Lenders' own costs

Secondly, lenders do not borrow money themselves at Base Rate and, while it used to be a reasonable reflection of their borrowing costs, over the last 18 months LIBOR (the rate at which they actually lend to one another) hasn't moved in line with the Base Rate - unlike in normal times.

Lenders have argued recently that the high LIBOR rate has prevented them from lowering their variable rates. And they claim that higher swap rates (the rate at which they borrow fixed rate money) are preventing them from lowering their fixed rates too.

But is this argument beginning to wear thin?

According to recent research, fixed rate mortgages are the worst hit by the disparity between lenders' borrowing costs and the rates offered to consumers, with the gap widening rather than decreasing. Swap Rates have actually been decreasing pretty steadily over the past two months and last week fell rapidly. 

One-year swaps (which reflect one year fixed rate prices) dropped below 3% for example. Five year swaps are below 4%, but the best buys (even at 60% loan to value) are still around 5%, meaning that margins are wide for lenders - and they get wider the higher the loan-to-value ratio.

LIBOR has also dropped from 5.77% before the November Base Rate cut to under 4% now. But borrowers are not feeling the benefit.  Best buy trackers have not fallen at the same speed and lenders are simply making more profit from their mortgage deals.

Collars removed                                                                                 

However, there is some good news on the tracker front as Halifax and Nationwide relented on the issue of tracker collars. Halifax's collar (a level beneath which the mortgage rate will not track) at 3% has been scrapped meaning that half a million tracker borrowers will see their rate reduce by the full 1%. And Nationwide followed suit, after initially saying borrowers would see their tracker collars enforced at 2.75%. A meeting of the board overturned the decision and now all Nationwide's tracker borrowers will see their mortgage rate fall by 1%.

Yorkshire Building Society and Skipton said their tracker collars (at 3%) would stand and have been triggered by the latest cut - so their tracker borrowers will not see their mortgage rate fall. They argued that they had to balance the needs of savers against borrowers. Yorkshire Building Society for example has seven times as many savers as borrowers.

As for how all those savers will be affected by the latest cut in rates, that's a whole other article. But suffice to say, savers are well and truly suffering.

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