FactCheck: passing on rate cuts?
Updated on 13 November 2008
Gordon Brown was "determined" banks pass last week's interest rate cut on to mortgage holders - but has it happened?
The claim
"And so we are determined not only that the interest rate cuts are passed through, we are also determined that lending resumes so that home owners looking for mortgages, small businesses looking for cashflow, families looking for the normal practices of banking to help them as they go through their lives, that that is properly resumed by the banking system."
Gordon Brown, prime minister, press conference, 7 November 2008
The background
The housing market is barely breathing, with estate agents in London selling as few as two properties a month. Mortgages are weighing more heavily on homeowners' pockets, and home repossessions are rising.
Time for unflash-Gordon to come to the rescue: the British government has gone to great lengths to unclog the banking system, staking billions of pounds of taxpayers' cash on a bailout package last month.
Capital was made available to struggling banks in exchange for a crackdown on bonus payments and a promise that lending would be restored to 2007 levels.
At a press conference last week, the day after the Bank of England announced a historic 1.5 point cut in interest rates, the prime minister was asked, for the benefit of struggling mortgage-holders, to explain his "Plan B" if the banks do not pass on the interest rate cut in full.
Brown confidently said he was "determined" the cut would be passed on. But a week on, has it happened?
The analysis
When it comes to the rate of interest charged, there are three main types of mortgage - fixed-rate, tracker and standard variable rate.
Fixed-rate does exactly what it says on the tin - the borrower signs up for payments at a rate of interest which is fixed, usually for two or more years.
The other two types of loan ride the fluctuating tide of interest rates as set by the Bank of England.
Tracker mortgages follow the Bank rate for a certain period of time - they may be set at, say, Bank rate plus 0.5 per cent. So if the Bank of England sets interest rates at 5 per cent, the borrower is charged 5.5 per cent; if rates are cut to 4 per cent, the charge to the borrower falls to 4.5 per cent.
Once the initial fixed-rate or tracker period expires, mortgages switch to the standard variable rates set by a particular lender. These are usually the most expensive type of mortgage, and tend to be set one-two points above the Bank rate.
So, how were these last two types of mortgage affected by last week's 1.5 point rate cut?
Research carried out yesterday by Moneyfacts found that the vast majority of banks and building societies had cut their standard variable rate by 1.5 per cent.
But it's a different story when we come to tracker mortgages, which most lenders withdrew in the wake of the interest-rate cut, and started to re-introduce yesterday.
HSBC passed on the rate cut in full, with new customers being charged 5.49 per cent before the cut and 3.99 per cent after: 0.9 per cent above the Bank rate in both cases.
But the part-nationalised Lloyds TSB passed on between 0.6 per cent and 0.9 per cent of the cut, while another part-nationalised bank, Halifax, passed on 0.86 per cent.
The Spanish-owned Alliance and Leicester cut its rates by just 0.9 per cent.
Initially, things look better at Abbey, also owned by Santander, which passed on between 1.3 per cent and 1.45 per cent. However, the bank raised its rates by half a per cent at the start of last week, so it's not such a peachy longer-term picture.
The verdict
Brown seemed pretty adamant last week that interest rate cuts would be passed on to consumers, but it's not happened across the board.
Although those on standard variable rate mortgages have felt the full benefit of the Bank's cut, customers looking for tracker mortgages have fewer options.
With the government engaged in an unprecedented nationalisation of the banking industry, it remains to be seen how much influence Brown has over bank lending.
FactCheck rating: 3
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The sources
Gordon Brown press conference transcript
Moneyfacts
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