FSA warns on “floors” in tracker rate loans

| December 3, 2008 | 0 Comments
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The Financial Services Authority (FSA) has warned banks and building societies not to use the small print in mortgage agreements to avoid passing on cuts in the Bank of England’s base rate.

The Bank is widely expected to cut the base rate again this week, by up to 1%.

However, some lenders have included “collars” or “floors” in the terms and conditions of their tracker loans, fixing a level below which interest on the loan will not fall.

Borrowers who have opted for loans that track the Bank of England base rate could therefore find that their monthly repayments will not decrease, should the base rate fall to 2%, in December.

According to press reports, a Nationwide tracker loan can opt out of cuts in the base rate below 2.75% and Halifax may not pass on cuts below 3%.

In the case of Nationwide the 0.5% margin above base rate on a tracker mortgage means that the lowest interest rate payable is 3.25%.

The FSA’s retail market managing director, Jon Pain, has made it clear to lenders that where a tracker interest rate floor is included in the terms of a mortgage, it needs to be clear and unambiguous and consistently and prominently spelt out to the consumer, throughout the sales process.

Where a lender cannot show that this has been done, Mr Pain suggests it could be in breach of disclosure requirements and promoting an unfair contract term.

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