I would not castigate lenders for not passing on the full 0.25% cut. The majority are operating on wafer thin margins in a property market where borrower confidence is pretty fragile. Paradoxically, these conditions are favourable to advisers ‘ because with the standard variable rate (SVR) reductions being so varied the borrower now needs discerning advice more than ever.
We are seeing a move towards the base rate trackers, but my feeling is this is a little belated because we might be at the bottom of the curve. Five-year fixed rates represent incredible value now, but certainly in the South East the client’s desire for more affordable, two-year products is still winning out.
Lenders’ margins are getting smaller and smaller, so they will be reluctant to pass on the savings to the client with the same speed they implement a rate rise. Lenders should always pass on the savings to the borrower straight away, but a base rate tracker removes this power and control.
Interest rates will need to drop a further 1% over the next year if we are to have true low inflation, and be competitive in both European and global markets.
And so the banks are in for a hard time, but for a borrower on a base rate tracker, repayments have never been so good. I would always advise the borrower to go for a base rate tracker mortgage. This gives full and total control to the borrower, the rate cut is immediate and the borrower does not rely on the lender to pass on the savings immediately.
The One account
After 14 months without a change in interest rates the decision to cut them to a 48-year low caught almost everyone off guard.
One of the reasons the Monetary Policy Committee (MPC) gave for slashing the base rate was weaker demand both at home and abroad. And one way to stimulate domestic consumer demand is cheaper mortgages.
A full rate cut of 0.25% will lop more than £20 a month off a £100,000 home-loan.
However, the reaction from lenders was mixed. Some decided to offer a partial rate cut, others delayed making a decision at all and at the time of writing only two lenders have passed on the benefit in full, The One account and Sainsbury’s Bank.
The One account is fairly priced to allow it to pass on rate cuts to its customers whenever the MPC announces such a decision. The inability to pass on rate cuts immediately and in full is synonymous with loss-leading pricing strategies.
Limiting mortgage rate reductions by making reference to savings rates is an argument often put forward by lenders. This is because the interest rates for some savings accounts may already be at a minimum level, or have guarantees applying, meaning they cannot be moved.
As rates fall, savers increasingly look to protect their savings. The consequence is a move to higher paying accounts, increasing the cost to the providers. It is therefore inevitable lenders have sought to protect their position and limit the mortgage rate reductions.
The decision to switch to fixed or variable rates should be delayed for a week or two, as lenders are likely to re-price mortgage products due to falling money market rates.
Expecting interest rates to reduce in line with drops in BBR over-simplifies the model lenders use when pricing products. In reality other factors are considered when setting prices. These include corporate objectives, funding, product design, competitive position, internal resources, demand, distribution, profitability and effects on savers, if appropriate.
In a competitive environment lenders should be free to make their own pricing decisions that take into account all relevant factors, both from a micro and macro perspective.
Having said all that, from the point of view of the borrower, tracker products (for example, those that track the BBR or are tied to Libor) do provide greater transparency. But despite this it is not the rate alone that determines the suitability of a product.
As in any industry lenders price their products in line with their peers. This is balanced against giving borrowers the best deal possible, offering savers a return on their deposit and making a profit. In a low interest rate environment, such as we have today, it is an incredibly tough balancing act.
Therefore which products borrowers should opt for depends on individual circumstances. Some borrowers will take out a tracker product to ensure they feel the benefit of any further rate reductions.
However, fixed rate mortgages are becoming increasingly attractive. Borrowers are keen to tap into the certainty a fixed rate mortgage offers and we are seeing a growing appetite for this product.
For a lender not to pass on all of a base rate cut could be thought of as profiteering, however, they never promise to do so and, as the majority are plcs, they have to act both in their shareholders’ interest and that of the customer. But advisers share some responsibility for borrowers being on an SVR, particularly with the choice we have in a competitive market.
The overall message should be that now is a good time to remortgage to trackers or fixed/capped rates. Redemption penalties aside, there are not many good reasons for any borrower remaining on an SVR.
Also when advising on purchases, advisers should consi der the advantages of BBR trackers and fixed rates, such as the new products recently launched by Woolwich.