Borrowers unlikely to benefit fully from rate cut

Borrowers are unlikely to see the full benefit of this week's anticipated interest rate cut as banks focus on protecting their savings rates.

The Bank of England's Monetary Policy Committee (MPC) is widely expected to slash official interest rates by at least 0.5 per cent on Thursday, with some economists pencilling in a 1 per cent reduction.

But the majority of lenders are expected to pass on only half of any cut to their standard variable rate (SVR) mortgage customers, with some expected not to reduce their rates at all.

Three-quarters of lenders with an SVR passed on at least some of December's 1 per cent base rate reduction, but only 19 reduced their rate by the full 1 per cent, with some passing on just 0.15 per cent.

Michelle Slade, an analyst at Moneyfacts.co.uk, said: "With each base rate cut, the number of lenders passing the cut on in full to their SVR continues to dwindle.

"It is likely that some lenders have already cut rates as low as they are prepared to go."

Only three of the UK's top 10 lenders reduced their SVR by at least 1 per cent in response to the December cut, namely Lloyds TSB, Barclays' lending arm the Woolwich and HSBC, with Halifax making the smallest reduction of 0.25 per cent.

A number of lenders, including the Lloyds TSB group, Nationwide and Skipton Building Society, have pledged that their SVR will never be more than a set percentage above the base rate, leaving them with little choice but to pass on any reduction in full, but other lenders have more leeway.

Ray Boulger, senior technical manager at John Charcol, said: "The lower bank rate goes, the less of it is going to be passed on."

If the MPC reduces the official cost of borrowing by 0.5 per cent on Thursday, Mr Boulger expects lenders to reduce their SVR by around 0.25 per cent or nothing at all in some cases.

If the reduction to the base rate is 1 per cent, he thinks only around half of this will be passed on to borrowers.

Lenders can no longer use the excuse that they are failing to reduce their rates because wholesale funding costs are not falling in line with the base rate.

The key inter-bank lending rate, three month Libor, is currently 2.61 per cent, which while it is higher than its pre-credit crunch spread of being between 0.15 per cent and 0.2 per cent above the base rate, it has fallen by 1.18 per cent since the day before December's 1 per cent cut.

But banks and building societies are also increasingly having to balance the needs of their savers against those of their borrowers.

Lenders cannot afford to cut their savings rates too low, as they are heavily dependent on attracting depositors' money to fund their mortgage lending.

Nationwide announced last week that it would not be passing on any future interest rate cuts to the majority of its tracker mortgage customers, instead invoking a clause in the deals that enables it to stop reducing the loans in line with cuts to the base rate once it falls below a certain level.

It said the move, which will affect more than 250,000 customers, was to protect its savers from further aggressive rate cuts, and other lenders are expected to follow suit.

Tracker customers with other lenders will also fail to benefit from any reduction due to similar clauses, known as collars, already kicking in on the deals.

If the MPC does reduce the base rate by 0.5 per cent, it would shave around £40 a month off repayments on a £150,000 mortgage, while a 1 per cent cut would slash monthly repayments by £80 if lenders passed on the cut in full.

The reduction is even more dramatic for people with a £250,000 mortgage, with a 0.5 per cent cut potentially reducing repayments by around £68 a month, and a 1 per cent reduction cutting them by £134.