Mortgage Lenders Fail to Pass on Interest Rate Cuts

Most lenders haven’t passed on cuts to the Bank of England’s base rate, making mortgages more expensive for borrowers. And building societies are among the worst offenders.

If you’re struggling to pay off a mortgage, here’s an unwelcome conundrum for you.

Although the Bank of England base rate continues to be at an all time low, the average standard variable rate (SVR) offered by mortgage lenders stands at 3.48% above the base rate. In September 2008 it was only 1.95% more.

So why has it become more expensive to borrow from mortgage lenders as interest rates have fallen?

The simple reason is that most lenders haven’t been passing the full cuts in the base rate to their SVR customers, while some have even been increasing their rates – that’s the finding of new research by Which? Money.

Its survey of 91 lenders found that 95% of them have failed to pass on full cuts to the base rate, and more than a fifth have increased rates since the base rate hit 0.5% in March 2009.

In fact, Cheltenham and Gloucester, along with Lloyds TSB Scotland, are the only lenders within the four major banking groups to pass on full interest rate cuts to SVR customers. However, Cheltenham and Gloucester has raised standard rates for new customers.

Surprisingly, Which? Money found that the organisations most likely to raise SVR rates were building societies. The Manchester Building Society pushed its rate up 0.65% to 5.49 in June 2009, while Norwich and Peterborough raised its own SVR by 0.5% to 5.35% in February 2010.

The highest SVR of any surveyed lender is also offered by a building society – KRBS – which offers an SCR of 6.08%, over 12 times more than the base rate.

Rates like these are profitable for the lenders, but put a major squeeze on borrowers. An increase of just 1% can add £600 to the annual repayments of a borrower with a 20-year mortgage for £100,000. That could cause serious problems for many householders’ personal finances.

Combined with increases to mortgage application fees and the need to secure many loans with hefty deposits, getting good mortgage deals is difficult in the current market – and looks set to remain so for some time.

Moneyhighstreet comments: “This research highlights how cuts to the base rate result in better savings for lenders than they do for borrowers.

“However, there are still good mortgage deals out there if you invest time in looking for them. The average cost of a two-year fixed-rate mortgage dropped to 4.41% in May, and growing numbers of loans are available with only a 5% deposit.

“That said, many borrowers are forced to move to SVR deals when the fixed-rate period of their mortgage ends, so if you choose this kind of mortgage be sure you can cope with a future increase in interest rates.”