Lenders have got us over a barrel. If the base rate falls they say they will not necessarily cut their standard variable rates (SVRs); the only way to be sure of a cut is to get a tracker mortgage (which offer a rate tied to the Bank of England base rate) and they have even started to withdraw them.
Last night, three major lenders pulled their tracker loans. They are not the first and will probably not be the last - brokers have been saying for weeks that anyone after a tracker needed to act fast to secure a good deal. Those that are left are getting more expensive, with lenders who remain in the market repricing them to offset recent rate cuts.
The problem, say the lenders, is that base rate cuts no longer lead to an immediate reduction in funding costs. The inter-bank borrowing rate is now 1.2% above the base rate - less than it was a few weeks ago, but more than the 0.7% margin in mid-September when the Lehman Brothers collapse triggered a new squeeze on credit. This is why SVRs won't necessarily fall in line with the base rate and tracker mortgages will continue to grow.
If the inter-bank borrowing rate goes down, lenders will probably start to reduce the margins on their tracker deals - but will they pass on an instant cut in their SVRs? It seems unlikely. Although in the small print lenders always reserve the right to change these rates as and when they choose, you can bet borrowers are unlikely to be hit by any surprise cuts in the time between base rate decisions.
The prime minister has told lenders they should pass on today's cut. But the government isn't exactly leading from the front. Northern Rock, the lender it nationalised earlier this year, has only cut its SVR by 0.15% as a result of last month's 0.5% cut and has recently withdrawn its tracker deals - hardly a great example to other lenders. Worse still, at Northern Rock many borrowers are actually trapped paying the SVR - which even after the cut will be a hefty 7.34% - because they borrowed so much that no other lender will take on their debt and the bank will not allow them to switch to one of its cheaper deals.
If it won't act to make life easier for borrowers what chance is there of it doing anything to make other lenders cut rates?
