What does the cut mean for borrowers and what's going on with trackers?
In case you missed yesterday's news, the Bank of England has slashed its base rate by a whopping 1.5% to 3%. To many mortgage borrowers this will mean an immediate and significant cut in their monthly repayments, but not for all. New borrowers in particular might be feeling a bit miffed that lenders have been pulling their mortgage ranges left, right and centre over the last few days.
So how will the cut make a difference?
Existing borrowers
The majority of current mortgage borrowers (58%) are on a fixed rate, so this cut will not make any difference to their monthly repayments. But for those with fixed-rate deals coming to an end next year, there's a chance they will have a wider choice of more competitive deals available to remortgage onto. A chance, but of course, no guarantees.
One in 10 borrowers are on a rate linked to their lender's Standard Variable Rate - either on SVR itself or a discounted variable rate. They will have to wait and see if their lender passes on the cut, in full, in part or not at all. At lunchtime on Friday Lloyds TSB, Cheltenham & Gloucester, Bradford & Bingley, Abbey and Nationwdie had announced they would pass on the full cut. Most of the others were assessing the situation.
Many lenders were unable (or unwilling) to pass on last month's 0.5% cut, so don't assume that all lenders will pass on this month's 1.5% cut - regardless of the enormous political pressure they're under.
Stopped in your tracks
Everybody seems to be talking about tracker mortgages at the moment (including myself). Is the whole world on a tracker? Or should we be? And how are they affected?
Well, a significant number of borrowers (31%) are currently on tracker rates and these are the luckiest mortgagors around.
Trackers follow the base rate at a set margin, so if your tracker was set at Base + 1%, your rate would fall by 1.5% to 4% as a result of yesterday's cut. That cut would usually come within a month.
Tracker borrowers are also benefitting from a 0.5% decrease in rates last month so they've been handed an early Christmas present of a 2% cut in the last two months. Based on a £150,000 repayment mortgage that is a whopping average monthly saving £166!
But there is a sting in the tail for some tracker borrowers who have found that their lender has 'collars' on its tracker rates. That means there is a particular level beneath which your mortgage rate cannot fall - regardless of what happens to Base Rate. It's basically the opposite of a capped rate.
These collars have never come into play before as we haven't had rates drop low enough, but now it's likely that some tracker borrowers will find their collar invoked and be unable to benefit from any further reductions in Base Rate.
For example Halifax, Skipton Building Society, Yorkshire Building Society (and its subsidiary Accord) all have collars, or the right to impose a collar at 3% on their tracker deals. Nationwide's collar is 2.75% and HSBC has it written into its smallprint that a `material change in the market' would allow it to not pass on cuts.
What about new borrowers?
At least 15 lenders have pulled their tracker rates over the last few days or repriced them at a higher margin to Base Rate (to effectively cancel out a drop in rates). These include most of the big high street names such as Lloyds TSB, Nationwide, Northern Rock and Alliance & Leicester.
Some ranges will be relaunched in the next couple of weeks, at a greater margin to Base Rate.
However, at the time of writing HSBC had one of the only remaining tracker deals available (and certainly the best). The rate is Base plus 0.99% -- currently 3.99% -- and comes with a modest £799 fee. However it is only available up to 60% loan to value, so you will need a hefty 40% deposit or equity to get it. At noon on Friday I was told by HSBC that the deal was still available and that they are trying to stay in the market and give borrowers an option, and would be back with a fuller range of trackers next week.
The disappearance of most trackers will come as a blow for borrowers or remortgagors as in a falling interest rate environment they are clearly a good bet.
LIBOR drops
Of course, lenders' costs are related more closely to LIBOR than the Base Rate. Today we've seen 3-month sterling Libor fall by more than 1% to 4.49% which is very encouraging.
That's still a wider margin to Base than in normal times, hopefully that margin will narrow further. In fact, I believe the margin will reduce in the next month but I am no economist -- and even they haven't a clue.
For those who want a fixed rate, deals have been cut in the last week and it is expected that they will fall further in response to falling Swap Rates and LIBOR - hang on if you can. Trackers are still the best bet for my money though - even assuming they are all repriced at a greater margin. If you get into one you could see a further 1% fall in the rate over the next six months -- but don't get caught out with a collar.
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