Black October for buyers with a tracker mortgage
Last updated 05:16, Friday, 21 November 2008
Tracker mortgage rates for new borrowers soared to a seven-and-a-half-year high during October despite interest rates falling during the month.
The average cost of a tracker mortgage for someone with a 25 per cent deposit jumped to 6.84 per cent during the month, up from 6.12 per cent in September, according to the Bank of England.
The increase came despite the Monetary Policy Committee reducing interest rates by 0.5 per cent during the month, meaning that the margin the loans charged above base rate more than doubled from 1.12 per cent in September to 2.34 per cent.
The figures show that while lenders have little choice but to pass on base rate reduction to existing tracker customers, they are taking the opportunity of rate cuts to increase their margins on new business.
Lenders scrambled to withdraw their tracker mortgages following last week’s surprise 1.5 per cent base rate reduction, with 33 lenders pulling their entire range of the products for re-pricing.
So far, only Abbey has relaunched the loans, saying that it will be passing on 1.45 per cent of the reduction to borrowers with a 40 per cent deposit.
Ray Boulger, senior technical manager at John Charcol, said that some of the increase in the margin above base rate on new loans was because some lenders do not reduce tracker rates for new customers until the first day of the month after the cut, in line with reductions for existing customers.
But he added that a lot of the increase was down to the turmoil in the money markets caused by the collapse of US investment bank Lehman Brothers in September.
He said: “The biggest reason for the increase is that in mid-September when Lehmans collapsed, money markets tightened.
“Until mid-September we had seen lenders competing for business, but after mid-September they withdrew their products very rapidly and replaced them with ones with higher margins.”
He added that the key inter-bank lending rate three-month Libor, upon which variable rate mortgages are based, was also slow to respond to the base rate cut, taking nearly a month to fall by 0.5 per cent.
The Bank of England’s figures also showed that while two-year fixed rate mortgages for new customers with a 25 per cent deposit fell by 0.16 per cent to average 5.8 per cent during the month, the cost of other fixed rate deals increased.
Five-year fixed rate mortgages for people with a 25 per cent deposit rose by 0.5 per cent to 5.89 per cent, while 10-year ones jumped by 0.22 per cent to 6.26 per cent.
Both fixed rate and tracker mortgages are expected to fall significantly during November due to a combination of the latest interest rate cut and a stabilisation in money markets.
The average standard variable rate fell by only 0.01 per cent to 6.94 per cent during October, although this may be because most lenders who did reduce their SVR following the base rate cut waited until November 1 to do so. But only 54 out of the 96 lenders that have an SVR mortgage passed on October’s interest rate cut to new and existing customers, with many of these failing to pass on the full 0.5 per cent reduction.
So far 19 mortgage lenders have said they will reduce rates following November’s base rate cut, with all but one passing on the full 1.5 per cent.
