It used to be the case, as sure as night follows day, that when the Bank of England cut interest rates it would bring relief to mortgage borrowers and discomfort to savers. Generally, mortgage and savings rates would move in step with the Bank's base rate. But now the world has changed and with it the old linkage between Bank base rate and the actual cost of our mortgages, and pay rate on our savings, has become frayed at best and perhaps broken at worst.
The reason for borrowers' and savers' universes turning upside-down can be summed up, as with everything else money-related in 2008, in the dread phrase "credit crunch". Put simply, the fact that financial institutions are less willing to lend to each other means that banks and building societies have to attract more money from savers. They do this by paying over the odds to attract this cash. This is good news for savers, particularly those looking to shop around for the best deal rather than stay with just one provider.
The downside, however, has been felt by mortgage borrowers. What money is available through the international money markets is more expensive than it use to be – relative to Bank base rate. What's more, because banks and building societies have to pay more to savers to pull them in, that cash is more costly too. As a result, mortgage borrowers are finding lending criteria tighter than at any time in recent history and the rate they are paying – in many instances – kept high. So even when the Bank cuts rates – as it did last Thursday by an unexpectedly large 1.5 per cent (from 4.5 to 3 per cent) – many borrowers are likely to benefit only partially.
"There is a real disconnect between what the Bank of England does and mortgage rates, and it will be there for some time to come," says Ray Boulger from broker Charcol. "It's costing more for banks to finance their loans and it's this cost which is reflected through the mortgages on offer," he says.
Michelle Slade (opposite) from the financial information provider Moneyfacts.co.uk says the Bank base rate, as far as many mortgage borrowers are concerned, is fast becoming an irrelevance. "It used to be the case that mortgage rates would move in line with Bank base rate. Base rate fell and mortgage rates would reduce by a similar amount," she says. "However, base rate is a bit redundant, as the high street lenders are setting many of their rates according to the inter-bank rate [the price of loans that banks make between each other]." And these inter-bank rates, although they fell markedly on Friday, are not coming down anywhere near as far or as fast as the Bank of England base rate.
The previous time base rates fell – from 5 to 4.5 per cent in October – many lenders did not pass this on to their borrowers. Fewer than a third passed on the full 0.5 per cent cut to their standard variable rate borrowers, with the remainder choosing to either pass on a fraction of the cut or, in some high-profile cases such as HSBC, nothing at all.
Mr Boulger reckons that, this time around, the response will be just as slipshod. "The banks which took part in last month's bailout have been pressured to cut, but expect others who didn't take the Government's shilling to cut by less than that," he says.
To date, out of the big lenders, Abbey, Lloyds TSB, Bradford & Bingley, NatWest, Nationwide, RBS and Halifax (the last four following talks with the Government) have lowered their standard variable rates by the full 1.5 per cent. The big winners will be borrowers with a tracker mortgage that is pegged to the base rate. "This is around 30 per cent of customers and they should see their mortgage repayments fall substantially," says Mr Boulger. To put this into context, monthly mortgage repayments fall by around £15 to £20 on a £100,000 mortgage for each quarter per cent cut. Therefore, a hefty 1.5 per cent cut equates to £90 to £120 wiped off monthly repayments on every £100,000 borrowed. But the good times may stop there for many tracker borrowers because of a clause written into their contracts.
"Some lenders have a 'collar' in place. This means that they don't have to cut rates below a certain level," Mr Boulger says. Halifax and Skipton building society has its "collar" at 3 per cent, while Nationwide has its set at 2.75 per cent. People looking to move to a tracker mortgage may find they have missed the boat. "In the run-up to the base rate cut, we had a host of lenders including Halifax, Woolwich, Britannia and Nationwide either withdrawing or re-pricing their tracker," Ms Slade says. Since the Bank of England's announcement, 34 lenders have withdrawn tracker products, an unprecedented flight away from the sector. What is likely to happen is that lenders will raise the premiums they charge above the Bank base rate so borrowers will see only a partial reduction in what they pay. Likewise, people looking to remortgage with high loan to value ratios [LTV] are finding that the deals are not getting cheaper. Some are unable to remortgage, as other lenders do not want to take on the high LTV risk and so they are stuck on their lender's standard variable rate when their deal comes to an end.
Fixed-rate deals, though, are getting marginally cheaper, according to Mr Boulger: "Rates on two- and three-year fixed rates are getting lower, reflecting reducing long-term money market rates." Again, although people with higher LTVs may find their path blocked to the best fixed-rate deals, he says, "people need to be aware that the value the mortgage company puts on their home may be much lower than their own reckoning. They could find themselves branded as having a higher LTV as a result, and this means higher rates when it comes time to remortgage."
As for Britain's army of savers, the impact of the base rate cut will be varied, as banks and building societies are still keen to attract deposits. "The last time rates were cut, banks and building societies cut rates on accounts that were no longer open for new business by around the same as the Bank's reduction. However, the best buy accounts remained lucrative and paid well above base rate," Ms Slade says.
But Andrew Hagger from the financial advice site Moneynet.co.uk reckons the "good times will soon be over" for savers: "Five weeks ago, we had 15 to 20 accounts paying 7 per cent or higher. But this situation is only going to deteriorate. Some banks and building societies will want to attract money – perhaps from former Icesave customers who are set to be refunded around £4bn – and this will support rates and ensure they don't fall by the full 1.5 per cent. However, it's inevitable that rates are going to fall, and some quite sharply. The best advice is, if you're prepared to tie your money up for a year or so, to go for one of the fixed-rate accounts on offer now," he says.
However, anticipating the rush of rate-hungry savers, a host of providers pulled their fixed-rate accounts on Friday, in what the price comparison website Moneysupermarket.com called an "unprecedented step".
All in all, though, the Bank's move to cut rates by such a large amount could, in the short term, bring about the worst of both worlds for some UK consumers. "We could be left in a situation where rates fall faster for savers than for many mortgage borrowers. The landscape for savers and borrowers has changed utterly," says Mr Hagger.