Mortgage lenders use base rate cut to make up losses

Many homebuyers with variable-rate loans will have been disappointed that the Bank of England’s recent cut in the base rate, from 5.75% to 5.5%, will not be lessening their mortgage repayments in the near future.

Lenders including Alliance & Leicester, Bristol & West, Standard Life and Northern Rock have failed to respond by cutting their standard variable rates (SVR).

Last week these and other banks stated they were reviewing their SVRs but some Independent Financial Advisers and mortgage brokers are accusing lenders of using the base rate cut as an opportunity to offset losses from the US sub-prime mortgage crisis, at the expense of homebuyers.

Both Halifax and Nationwide responded immediately to the interest rate cut, reducing their SVRs from 7.75% to 7.5% and from 7.24% to 6.99% respectively, but according to Melanie Bien of Savills Private Finance: “Many homeowners will be left disappointed this Christmas … lenders are looking to retrieve some profit margin so they hit their end of year targets and are reluctant to pass on the full benefit of the rate reduction to borrowers.”

Ray Boulger of mortgage broker, John Charcol, estimates that borrowers will pay an extra £10 million per month because of the refusal of around half of all lenders to cut their SVRs in line with the base rate.

However, borrowers can make savings by remortgaging and with further reductions in the base rate expected in 2008, a base-rate tracker mortgage should be considered.

It is the most transparent of variable-rate mortgages because if the base rate falls, the borrower is guaranteed to see the same reduction in his or her monthly mortgage payment, usually by the following month.

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