After holding the base rate at 0.5% for over seven years, on 4th August, the Bank of England cut interest rates to a new record low of 0.25%. Many mortgage holders, especially those on variable rates, would have expected to make savings but over a month later and research showed that less than half of UK mortgage lenders had passed the full 0.25% interest rate drop onto their customers.
There are an estimated 2.2m borrowers in the UK on standard variable rate (SVR) mortgages and the Governor of the Bank of England made it clear that he expected lenders to pass on the savings, saying they had ‘no excuse’ not to do so. However, analysis showed that standard variable rates are still 18 times higher than the 0.25 base rate, falling just 0.11% to a typical 4.71% in August.
Tracker rates, which follow the movements of the base rate, fell by an average 0.19% from 2.13% at the start of August to 1.94% at the beginning of September. Interestingly, however, many lenders seem to have anticipated the rate cut and actually increased their tracker rates prior to the August announcement with average two-year variable tracker rates rising from 2.01% in July to 2.13% on 1st August.
As well as reducing their tracker and standard variable rates, lenders would be expected to reduce their fixed rate mortgages, but again, lenders are not passing the full savings on and the average two-year fixed rate has fallen just 0.03 percentage points since the 0.25% base rate cut, taking the average rate from 2.48% to 2.45%.
The Monetary Policy Committee (MPC), which sets the base rate, appear to have been expecting some resistance from lenders, and their statement following the cut noted that “as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates”
To mitigate this, a Term Funding Scheme (TFS) was launched to provide funding for banks at interest rates close to the 0.25% Bank Rate, although as it has only recently launched, the full effect of this scheme is yet to be seen.