Lenders scramble to withdraw tracker deals as interest rates plunge
Mortgage lenders yesterday scrambled to withdraw their tracker deals following a surprise 1.5% cut in interest rates.
Around 30 lenders have pulled their range of the loans, which automatically move up and down in line with the Bank of England base rate, for repricing.
Among those who have withdrawn the deals for new customers are major groups such as Halifax, Nationwide, Abbey, Barclays' lending arm the Woolwich and Lloyds TSB.
A number of other lenders had previously hiked their tracker rates by up to 0.8% ahead of today's base rate cut.
Ray Boulger, senior technical manager at John Charcol, said: "By the end of today there will be very few trackers left on the market.
"We will have to wait several days before we see them re-emerge and know by how much lenders have hiked their rates above base rate."
The race to withdraw tracker deals is bad news for new mortgage customers as it suggests they will not see all of the benefit from today's cut.
Not only are lenders likely to increase the margin they charge above base rate on the products, but they may also take the opportunity to increase the size of deposit they demand from borrowers.
Existing customers with standard variable rate (SVR) mortgages are also not expected to benefit from the full 1.5%, with Mr Boulger predicting the number of lenders who reduce their SVRs by this amount will be in single figures.
Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, was the only group to announce immediately a reduction to its SVR.
It is reducing the rate by 1.5% to 5% from December 1, although as it pledges that the deal will never be more than 2% above base rate, it was left with little choice.
It was later joined by Abbey, which is also passing on the full 1.5% reduction to SVR customers.
The British Bankers' Association was at pains to stress that the reduction in the base rate would not automatically lead to lower funding costs for lenders themselves.
The problem for lenders is that the key inter-bank lending rate three-month Libor, upon which many variable rate mortgage deals are based, remains stubbornly high.
Today's three-month Libor rate, which was announced before interest rates were cut, was 5.56%, 1.06% above the base rate before the 1.5% reduction and a massive 2.56% above the new official cost of borrowing.
This is well up on its typical pre-credit crunch range of between 0.15% and 0.2% higher than base rate.
It took nearly a full month for October's 0.5% reduction to be reflected in the three-month Libor rate and there is no reason to expect today's cut will be priced in quickly.
Karen Barrett, marketing director at mortgage adviser website Impartial.co.uk, said: "With Libor rates falling slowly, but not keeping pace with Bank of England base rates, we expect to see very few lenders pass on the full 1.5% to their borrowers."
The current problems in the mortgage market mean many first-time buyers are failing to benefit from the recent house price falls, as reductions in the cost of property are being offset by the higher mortgage rates, while lenders are also demanding increasingly large deposits.
Many groups now ask for a deposit of at least 15% from borrowers as they look to insulate themselves from future house price falls.
But today's reduction in the base rate to 3% is good news for the 4.7 million households who currently have either a tracker or a discount mortgage, with most of these customers seeing their rate automatically fall by 1.5%.
A 1.5% cut would provide some much needed relief for hard pressed homeowners, reducing the monthly cost of a typical £150,000 mortgage by £138 to £887, based on a new rate of 5%.
People who are heavily mortgaged with a £250,000 loan would see their repayments drop by £230 a month, or £2,757 a year.
Homeowners with fixed rate mortgages, who account for around half of all secured borrowers, will not see a change to their repayments, as their mortgage rate is fixed for the term of the deal.
Going forward, some tracker customers will no longer benefit from future base rate changes, despite the fact that their deal should rise and fall in line with the official cost of borrowing.
This is because interest rates have now got so low that some lenders will no longer have to pass on the reduction to customers as so-called floors or collars will kick in.
A number of building societies have a floor of 3%, while Nationwide stops reducing rates for its tracker customers if the base rate falls below 2.75%.
Halifax states in its terms and conditions that it has the option to change its tracker margins if the official cost of borrowing drops below 3%.
The Bank of Ireland tonight confirmed it will pass on the European Central Bank (ECB) 0.5% rate cut to its customers.
Bank director Brendan Nevin said: "The decision by the European Central Bank to reduce its rate from 3.75% to 3.25% is a welcome move.
"This reduction, which we are passing on in full is good news for potential home buyers and demonstrates that Bank of Ireland and ICS Building Society are very much open for mortgage business.
"Together with our attractive lending criteria, a wide and varied product range and excellent service levels, at Bank of Ireland Group we are committed to providing our customers with the right products, advice and options to buy their home."