Banks not passing on low interest rates

Recent information released by the consumer group Which? has indicated that banks and building societies have not been passing on the advantages of low interest rates to homeowners who have standard variable rate (SVR) mortgages.

The Bank of England's interest rates remain at a record low of 0.5%. However, the details from Which? have shown that when the Bank of England cut their interest rates by 4.5% during the recent financial crisis, 95% of mortgage lenders did not pass on the full amount of the cuts to their customers' SVR mortgages. Furthermore, approximately 20% of mortgage lenders have since put their interest rates up.

Over 40% of UK mortgage borrowers are currently tied to SVR mortgages. Should interest rates rise, these people may then face increasing financial difficulties. For example, a 1% rise on interest rates for a 20 year mortgage valued at £100,000 could equate to an increase of £50 in monthly mortgage repayments.

Many homeowners with SVR mortgages may also find it difficult to transfer their mortgage to a better deal elsewhere due to a lack of equity in their home. This could leave them trapped in an increasing SVR mortgage, having to find the extra funds needed to make their repayments. This could lead to an increase in repossessions.

David Hollingworth of London & Country mortgage brokers believes that borrowers should brace themselves in anticipation of higher monthly payments. He added: "I think lenders will look to push up standard variable rates by more than any base rate increase, that's where vulnerable borrowers really stand to lose."

The Council of Mortgage Lenders has stated that the SVR is not dependent on the Bank of England's base rate of interest, but on the lenders' ability to attract deposits from savers. However some experts believe that mortgage lenders have been making use of the low interest rates to increase their profit margins in order to recover the losses they sustained during the financial crisis.

Currently the average SVR is 3.48% on top of the 0.5% base rate, equating to 3.98%. This means that the average mortgage payer is paying interest at 8 times more than the actual rate of interest. In September 2008, the average was 1.5% above the base rate. On average, this means that lenders are more than doubling their profits from SVR mortgages than they were 3 years ago. Some lenders are showing SVR rates as high as 6.08% - over 12 times higher than the current interest rate. Typically these high rates are found in building societies.

There are some lenders which have passed on the full cuts in the interest rates to borrowers mortgages, notably Cheltenham & Gloucester and Lloyds TSB Scotland.

Jennie Gray, independent financial adviser at Retirement Solutions (UK) said, "If you are able to move your mortgage, it is advisable to consider one that does track the Bank of England's interest rate to make any future changes to your mortgage repayments much easier to predict".

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