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Lenders aren’t passing on base rate cuts

Lenders aren’t passing on base rate cuts

Category: Mortgages

Updated: 12/10/2016
First Published: 12/10/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Two months on from the base rate cut on 4 August, many will assume that the full effects should now be visible, ideally with borrowers benefiting in the form of lower rates. However, our latest research shows that the effect is mixed at best: some lenders have been wholly unresponsive to the base rate change, with many failing to pass on the full cut.

The figures show that the average standard variable rate (SVR) has fallen from 4.80% in August to 4.63% today, a drop of just 0.17%, despite the base rate being cut by 0.25%. By rights, many borrowers would have expected the full cut to be passed on, but that clearly hasn't been the case.

Fixed mortgage rates have fared slightly better, as the table below shows, but it's worth pointing out that these rates aren't bound by base rate fluctuations. Lifetime tracker mortgage rates have fared better still, with the average falling from 2.98% to 2.68% over the same period.

Average Rates 1 August
1 September Today
Standard Variable Rate (SVR) 4.80% 4.71% 4.63%
Lifetime tracker 2.98% 2.74% 2.68%
Two-year fixed 2.48% 2.45% 2.38%
Source: Moneyfacts.co.uk Compiled 12/10/2016

However, this hides greater variation among mortgages with shorter terms. Indeed, additional figures released earlier this week revealed that average two-year tracker mortgage rates have actually edged up this month, completely cancelling out the base rate effect to return to levels last seen in July, which means many variable rate borrowers will no longer be better off as a result of the cut.

A quarter fail to cut rates

"Many borrowers on their standard variable rate (SVR) hoping to benefit from the Bank of England reduction could be sorely disappointed as two months on, a quarter of lenders have still yet to cut their rates to reflect the new circumstances," said Charlotte Nelson, finance expert at Moneyfacts.

"In fact, the average SVR has fallen by just 0.17%, meaning on average borrowers are £9.10 a month or £109.20 a year out of pocket compared with where they should be [based on a £200,000 mortgage over a 25-year term on a capital and interest repayment basis]."

Much of this can be attributed to the uncertain state of the economy, explained Charlotte, which is putting pressure on lenders. They're erring on the side of caution as they react to the changes, but some borrowers will still be able to benefit.

"The picture is much brighter when looking at the average lifetime tracker rate," said Charlotte, "which has fallen by more than the 0.25% cut. This is likely to boost borrowers looking to take advantage of the low-rate environment we are expecting to experience for the foreseeable future.

"However, fixed rate mortgages are at record lows and anyone coming off a deal or looking to remortgage would be wise to look at a fixed deal. For example, borrowers would be £241.26 a month better off based on the average two-year fixed rate at 2.38% compared to the average SVR of 4.63% [using the same assumptions as above].

"With many mortgage deals at record lows, it is now a question of whether they are able to sustain this new level, and if so, for how long."

What next?

While not everyone has passed on the base rate cut, it's clear that there are still some great deals to be found – particularly if you're opting for a fixed rate. Check out the top mortgage deals to get started.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.