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September 20, 2016

Mortgage Lenders Reluctant to Pass on Interest Rate Changes


Pre-Brexit, those who were opposed to leaving the European Union went to pains to point out the potentially detrimental impact that going it alone would have on mortgages. We were warned that lending would be jeopardised, and that the housing market would face a full-blown crisis.

And yet, three months later, there is little to no evidence of these prophesises coming true. Now, experts believe that this is largely attributable to mortgage lenders, with around half of providers not passing on the Bank of England’s latest interest rate reduction, which has seen the base rate cut to just0.25 per cent.  

Flying in the Face of Convention

This decision by mortgage lenders may be putting the UK property market at risk of a slow-down, and it is not necessarily good news for borrowers either, who would be financially better off if this lower rate were passed on to them.

The move by providers has left many surprised, with Bank of England governor Mark Carney openly stating that they had been expected to do so. As a result, the initial reaction to the rate cut has been less positive than many hoped it would be. 

The decision takes the Bank of England interest rate to a seven-and-a-half-year low, and was introduced in the expectation that lenders would cut variable rate products to the 0.25 per cent base rate. This should have left borrowers in a stronger financial position, helping to combat any negative fallout from Brexit.

As expert Charlotte Nelson explains: "Borrowers would have assumed that a 0.25 per cent cut in base rate would make them financially better off, particularly if they were on a variable rate. However, this is unfortunately not the case, with just under half of providers failing to pass this cut on to their Standard Variable Rate (SVR) customers."

Fixed Rate Versus Variable Rate Mortgages

This has led many to question whether fixed rate mortgages now offer a more enticing alternative, and Nelson explains that this may well be the case: “Given that fixed rates are at all-time lows, borrowers sitting on their SVR could still be better off opting for a fixed rate.”

Tracker mortgages offer another alternative, with most falling in line with the base rate. Indeed, if we look at the figures, we can see that the average two-year option has decreased by around 0.19 per cent, whilst lifetime tracker rates have fallen by around 0.24 per cent.

Unfortunately, even these statistics provide a slightly erroneous picture, with many providers having taken a proactive approach prior to the base cut announcement by increasing their variable rate products, and thus minimising the effects of the reduction.

The implications of this are important for anyone looking to borrow, whether in the form of a mortgage, a loan with a guarantor, a secured option, or so on, as they mean that it might be better to be patient and wait to see where this course leads.

Nelson adds: "Given the bumpy road ahead for the economy, some providers are still quite cautious in their reaction to this new turn of events, with many choosing to wait and see to ensure they get the timing right."

Should you choose to follow their lead yourself, this may well mean that you are able to secure a more competitive rate once the dust has settled. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Mortgage Lenders Reluctant to Pass on Interest Rate Changes Rating: 5 Reviewed By: EconMatters