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Bank of England base rate cut

Will banks pass on 1% rate cut?

Friday 5 December 2008

By Becca Talbot becca.talbot@consumerchoices.co.uk

Celebrations aren’t in order for all homeowners as many lenders are refusing to pass on yesterday’s 1% base rate cut.

The base rate was cut by one percentage point yesterday to just 2%, as the Bank of England tried to avoid a deep recession.

The base rate hasn’t been this low since November 1951, and has never been cheaper since the Bank was formed in 1694.

Some of the major lenders made an immediate decision to pass on the full 1% rate cut to customers with a variable rate mortgage (SVR), while others have yet to say if they will pass on any or all of the cut.

Chancellor Alistair Darling appealed to banks to pass on the new rates to help individuals and businesses: “Banks must treat their customers fairly,” he said. “In the same way that banks expect their customers to stick to their side of the deal, customers should be able to expect that banks will stick to theirs.”

HSBC (www.HSBC.com) and Lloyds TSB (www.lloydstsb.com) both said they would pass on the cut to existing standard variable rate (SVR) customers. HSBC managing director Paul Thurston said: “We are committed to helping our personal and business customers through what are very difficult times and passing on the reduction in full will be a welcome relief for many.”

However the UK’s biggest mortgage lender HBOS said it will only reduce its SVR rates by 0.25%. A spokesman said the government had expected it to be run along commercial lines, which was what it was doing.

Shane O’Riordain, of HBOS, defended the bank’s decision: “All we are simply doing is seeking to achieve a decent margin like any other business, nothing more and nothing less.”

Halifax – part of the HBOS group with Bank of Scotland – said it will pass the Bank of England rate cut on in full to those customers with tracker mortgages.

All 250,000 Nationwide (www.nationwide.co.uk) tracker mortgage customers were initially told they would only see a 0.25% cut in interest on their repayments because of the lender’s “collar” rule that no tracker product can fall below 2.75%. Last night, however, the UK’s biggest building society had a change of heart and will now pass on the full 1% cut to all existing tracker customers.

Liberal Democrat Shadow Chancellor, Vince Cable said: “This cut is both necessary and welcome. However, it will only give real benefits if passed on to borrowers and if the Government takes a more active role to ensure that the banks maintain lending to British business.”

Last month’s 1.5% cut was only passed on in full by a quarter of lenders, and some didn’t change rates at all.

Analyst Ray Boulger, from independent mortgage experts John Charcol, said: “Despite the cost of fixed rate mortgages falling further over the last month they still look expensive, especially as the base rate is likely to fall further.”

He advises first-time buyers looking to take out a mortgage to choose carefully: “Trackers with a droplock option but no collar remain the ideal mortgage product in today’s market, although borrowers needing in excess of 75% loan to value (LTV) will find very little choice. You need to speak to an adviser to see what the best option for you is.”

Chris Eagle, commercial manager at CreditChoices.co.uk said: “The 1% cut in rates has brought the cost of borrowing down considerably, but it is still unclear who will benefit most from the cuts.”

He continued: “Although the announcement is welcome, its effectiveness will be massively reduced if the Government doesn't enforce the instruction for lenders to pass on the cut.”

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