Lenders are criticised as cut in interest rate fails to curb mortgage levels

Times Online

Banks and building societies came under pressure last night to do more to pass on the Bank of England’s quarter-point cut in interest rates, announced yesterday, to a wider number of borrowers. Even if mortgage rates were cut, homeowners would continue to see the cost of their loans rising, economists said.

Although many lenders announced that they would pass on the base-rate cut to borrowers, mortgage brokers said that recent increases in mortgage rates could wipe out potential savings.

The rate cut, the second in three months, seemed modest after the rate cuts in the US last month when the Federal Reserve cut the cost of borrowing by a total of 1.25 percentage points. But it sent out a clear signal that the Bank of England was taking a cautious approach.

Mortgage brokers said that banks and building societies — including Bradford & Bingley, Nationwide and Intelligent Finance — had increased the cost of tracker mortgages for new borrowers by up to 0.55 per cent over recent weeks in an attempt to offset this month’s interest-rate cut.

Halifax, NatWest, Woolwich, Abbey, Nationwide and HSBC said that they would cut their rates by a quarter point, but brokers suggested that this was effectively an empty gesture, because relatively few borrowers were on deals linked to their lender’s standard variable rate.

Other lenders were slower to respond. Many of the lenders that failed to pass on December’s quarter-point rate cut, including Alliance & Leicester and Skipton Building Society, refused to confirm that they would pass on the rate cut this time round.

Brokers blamed chronic funding shortages among lenders in the aftermath of the credit crunch for the reluctance to pass on the cut, as well as the recent increases in the cost of borrowing. Even lenders with strong balance sheets will be unable to pass on the full benefit to borrowers because they cannot cope with demand. Ray Boulger, of John Charcol, the mortgage broker, said: “The bad news for mortgage borrowers is that bank rate cuts have increasingly less of an influence on their pockets.”

Even the lenders’ trade body gave warning that borrowers should not expect lower mortgage bills. Michael Coogan, director-general of the Council of Mortgage Lenders, said: “Borrowers should not expect that a base-rate reduction will automatically result in a cut in standard variable rates or discounted rates. Lenders’ rate-setting policies are more complex than simply the level of the base rate.”

Borrowers already locked into a tracker deal will benefit from the rate cut, however. Those with a £250,000 mortgage pegged at the base rate will see their bills shrink by £444 a year. The 55 per cent of borrowers on fixed-rate deals will be unaffected.

Julia Harris, of moneyfacts.co.uk, the comparison site, said: “Lenders are trying to ensure they continue to make a profit and reduce their risk. Anyone looking to take advantage of the drop in rates by going for a tracker rate is not going to get as low a rate as they perhaps had hoped.”

The Bank of England’s rate cut came with a warning of increasingly challenging economic conditions. In a statement, the Bank said: “Credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased . . . and business surveys suggest that further slowing is in prospect.”

But the Bank was unable to cut rates further because of inflationary pressures. It pointed to the rising cost of energy and food. The Bank’s Monetary Policy Committee had access to the most recent inflation figures, due to be released publicly next week, during their deliberations.

The rate cut was not enough to revive confidence in the markets. The FTSE dropped by more than 100 points as several blue-chip companies reported profit warnings. Experts said that only a half-point cut would have affected the market as the quarter-point cut had already been factored in.

Many economists expect further rate cuts in the months ahead, although the expectation is that these will be introduced gradually. Roger Bootle, Economic Adviser to Deloitte and Touche, the accountant, said: “Today’s 0.25 per cent cut in interest rates to 5.25 per cent is another step along the path that will eventually take rates all the way down to 4 per cent.”

Alan Clarke, UK Economist at BNP Paribas, said: “The Bank is not about to encourage expectations of aggressive easing at this stage. That is not to say that the Bank won’t step up the pace of easing later in the year — we think it will. For now the Bank is trapped between plunging growth prospects and sharply rising inflation.”