Borrowers who took out tracker mortgages last year could see their interest rate drop to zero – or possibly enter negative territory – as lenders are removing the so-called “collars” that prevent rates falling below a certain level.
Halifax and Nationwide had clauses that prevented existing customers seeing any benefit if the Bank of England base rate fell below 3 per cent and 2.75 per cent respectively. But both lenders have removed these collars following government pressure to pass on this week’s 1 percentage point rate cut to borrowers.
EDITOR’S CHOICE
UK interest rates lowest since 1951 - Dec-04Mortgage approvals slump - Dec-01Deal of a lifetime - Nov-28N Rock raises mortgage rates - Nov-27Extra support for those struggling to pay mortgages - Nov-25Lenders lower mortgage rates, but raise hurdles - Nov-22The Bank this week cut its base rate to 2 per cent, the lowest level for more than 50 years.
Some of Nationwide’s existing customers are now paying less than 2 per cent on their mortgages. Borrowers with other lenders could be paying as little as 0.99 per cent as, a year ago, the cheapest tracker rate, from Cheltenham & Gloucester, was priced at 1.01 per cent below the base rate.
“Collars are effectively dead and buried,” said Ray Boulger at John Charcol, the mortgage broker.
He added that while some lenders have been specific about their minimum payment rates – Abbey, for example, has said its customers’ mortgage rate cannot fall below 0.001 per cent – some other lenders have not been as clear.
“There is now a very real possibility of the bank rate falling far enough for borrowers with a tracker mortgage to be on a negative margin and to be owed money by their lender,” he said.
However, C&G said that if a customer’s mortgage rate fell below zero, then those on a repayment mortgage would just pay off the capital and those on interest-only deals would pay nothing.
“The mortgage loan agreement and loan conditions clearly refer to interest being charged or payable by the customer,” said a C&G spokesperson. “There is no suggestion that interest would ever become payable to the customer.” So far, just C&G and HSBC have passed on the full base rate cut to their standard variable rates.
NatWest yesterday cut its SVR by 0.75 of a point. HBOS, the owner of Halifax, reduced its SVR by only a quarter of a point, while Nationwide cut its base mortgage rate by 0.69 per cent. A number of lenders withdrew their tracker mortgages before the rate cut was announced and have yet to reprice new deals.
