Banks and building societies have been urged to lower their mortgage rates in line with the Bank of England (BoE) which reduced its base rate from 0.5% to 0.25%. The governor of the BoE, Mark Carney, has said there is “no excuse” for lenders not to pass on the rate decrease.
The quarter percent reduction was one of a series of measures announced by the BoE to try and offset any negative impact happening as a result of Brexit. In addition to further quantitative easing, the decision to lower the base rate was also designed to encourage more spending within the economy.
However, it soon became apparent that some lenders were reluctant to cut their own interest rate, the impact of which would be an immediate lessening of the monthly mortgage repayments that millions of homeowners have to pay. Lenders are only legally obliged to pass on the BoE rate reduction to borrowers who have a tracker mortgage. It’s a different story for those who have a standard variable rate (SVR) mortgage where it’s up to the discretion of the lender whether they pass on the rate reduction.
This meant Banks and building societies were quick to give the rate cut for those mortgage products that are contractually linked to the base rate. However, some lenders, such as Lloyds Banking Group and the Royal Bank of Scotland, have delayed cutting their own mortgage rate for SVR mortgages.
Lenders say they’ll take a big financial hit if they reduce their mortgage rates still further, after they were already at a record low. Even with the BoE putting aside £100bn in order to compensate lenders, banks were resisting the rate cut. HSBC said it expects a £150m reduction in its yearly profits while Lloyds expects a £100m fall. It’s thought that banks may be waiting for guarantees regarding compensation or to see how the compensation scheme works before making any move now.
NatWest is typical of many lending institutions in not cutting its mortgage rate; 17% of its borrowers are on its SVR of 4% and have still not seen any reduction in their payments. A spokesman for the bank said: “We will provide an update in the near future whether we will make any changes to our SVR products. At the moment we are reviewing the situation.”
In contrast, some other lenders such as Santander and Nationwide have said they will pass on the rate cut in full in September. Virgin Money passed on the 0.25% cut immediately, with its chief executive, Jayne-Anne Gadhia, saying: “By passing on these cheaper borrowing costs to customers, we recognise the important role banks play in supporting growth in the underlying economy.”
It’s thought 30% of all mortgages taken out since 2004, around 2.3m loans, are standard variable rate mortgages.