How The Base Rate Will Affect Your Mortgage

What does the latest rate decision mean for mortgage borrowers?

With the Bank of England Base Rate at a record low of 1.5%, savers are struggling to see a positive return on their money after tax and inflation. But at least mortgage borrowers should have a smile on their face, right?

Not necessarily.

Of course, it's true that many existing borrowers have seen their monthly repayments plummet since October and this month could see them fall further.

Those who have been lucky enough to have a variable or tracker rate mortgage with Lloyd's TSB or C&G (the only lenders to have passed on all of the last four cuts to their SVR and tracker customers) will have seen their pay rate drop 3.5 percentage points -- over £200 a month on the average mortgage.

Many other lenders have passed on a large proportion of the cuts, and most variable rate borrowers will have still seen their rate fall significantly -- especially those on trackers.

Three cheers for trackers

Tracker borrowers will be feeling extremely pleased, with many having seen their pay rate drop.

But of course there has been plenty of consternation over those lenders who have imposed collars to prevent pay rates from tracking below a certain level. Nationwide for example is now invoking its 2.75% collar for some tracker customers, so they will see no benefit from yesterday's cut.

HSBC and Halifax said they will not be invoking any collars and all of their existing tracker borrowers will see pay rate reduce by 0.5%. RBS, NatWest, Abbey, Lloyds TSB and C&G are also passing on the full 0.5% to their tracker borrowers.

Setting the standard

All customers on standard variable rates, or a discount mortgage linked to standard variable rate, will be keen to see whether their lender chooses to pass on the half percent cut.

Full marks to Lloyds TBS and C&G for being the first to do so. The lenders (which are part of the same group and so offer the same range) now have SVRs at 3.5%.

Nationwide has also passed on the full 0.5% and will share the title of lowest SVR in the market with C&G at 3.5% (at time of writing). The building society's subsidiaries, Derbyshire and Cheshire, will also reduce their SVRs to 3.5% from 1 February 2009. Nationwide had to make this move to honour its SVR guarantee that it will never be more than 2% over Base Rate. This also means it will have to pass on any future cuts on SVR to keep its pledge.

HSBC is passing on the whole half percent, with its SVR now also under 4% at 3.94%. However Halifax said it will pass on just half of the cut (0.25%) taking its SVR down to 4.5%.

Abbey, Alliance & Leicester and Woolwich are among the large lenders yet to announce.

And remember, all borrowers currently on fixed rates (51% of the market) will see no difference in their monthly repayments for the duration of their fix.

What about new deals?

While existing borrowers are either seeing their pay rate maintained or reduced, things are not quite so rosy for new borrowers. But at least they are getting marginally better.

HSBC's existing term tracker for new borrowers and remortgagors has reduced by 0.5% to 3.45%, a great rate with a reasonable £799 fee. The deal is only available up to 60% loan-to-value so, unless you have at least a 40% deposit (or equity), it won't be accessible.

C&G pulled all of its tracker rates before yesterday's announcement in anticipation of the cut, but has pledged to come back into the market next week with a range of new trackers and reduced fixed rates.

However the lender has suggested that rates may not go down much further, as the wholesale markets (where lenders borrow) had already factored in the cut. In fact C&G said that now could be a good time to lock into a fixed rate.

But other experts argue that despite fixed rates falling, it is still not a good time to lock into a rate as trackers currently represent better value. I agree with this, especially when you look at the HSBC deal above.

It could also be a good idea to take an attractive tracker rate with a drop lock option -- offered by Nationwide and C&G for example. These trackers give you the option to switch to one of your lender's fixed rate mortgages at any time without having to fork out any early repayment charges.

Once C&G relaunches its trackers next week, it could be worth considering these deals, as unlike Nationwide, it doesn't have collars on its trackers. Therefore you could benefit from any further falls in rates and lock into a fix if circumstances change.

No choices

The biggest problem with trackers at the moment is that there are so few around, and those available are only open to those who have large deposits or large equity stakes in their homes.

The best deals require a 40% deposit, most others need at least 25% upfront and there are a handful of trackers available up to 80% (Woolwich and Derbyshire both offer deals at this level).

But if you have a deposit of less than 20% you are going to have to get a fixed rate or take a standard variable rate if you can access one.

Luckily fixed rates should drop slightly in the next few weeks. But for now my current favourite mortgage lender for high LTV borrowers is Britannia Building Society. It has a fee-free five-year fixed rate at 6.09% and it is still allowing new borrowers to access its SVR at 4.99% with no arrangement fees, again up to 90% LTV. Both are good deals for first-time buyers.

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