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CML warns lenders may not pass on base rate cut

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by Gill Montia
CML warns lenders may not pass on base rate cut

After today’s 1.5% cut in the Bank of England’s base rate, the Council of Mortgage Lenders (CML) has warned that lenders may not respond with a reduction in mortgage interest rates.

The CML points out that the UK’s mortgage providers do not automatically benefit from any cut in the base rate because the cost of funding their businesses is determined by their own borrowing costs.

These depend on the interest rates lenders need to pay their depositors and the rates charged by other funders on the wholesale money markets.

A number of addition factors have to be taken into account when setting mortgage rates, such as the need to improve the liquidity of a business, as required by the Government and Financial Services Authority.

The Council is therefore keen to point out that a lender’s decision not to follow a base rate reduction does not necessarily relate to profiteering.

However, borrowers on base rate tracker mortgages should benefit from the base rate cut today, from December, but with regard to future cuts, some lenders’ mortgage agreements contain a “collar”, below which lending rates will not follow the base rate.

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News posted: November 6, 2008

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