Mortgage lenders yesterday scrambled to withdraw their tracker deals following the surprise Bank of England�s 1.5 percentage point cut in the base rate.
Mortgage lenders yesterday scrambled to withdraw their tracker deals following the surprise Bank of England's 1.5 percentage point cut in the base rate.
Ray Boulger, senior technical manager at John Charcol, said by today there would be "very few trackers left on the market". He added: "We will have to wait several days before we see them re-emerge and know by how much lenders have increased their rates above base rate."
The race to withdraw tracker deals is bad news for new mortgage customers as it suggests they will not see all of the benefit from the rate cut.
Not only are lenders likely to increase the margin they charge above base rate on the products - they may also take the opportunity to increase the size of deposit they demand from borrowers.
Existing customers with standard variable rate (SVR) mortgages are also not expected to benefit from the full cut, with Mr Boulger predicting the number of lenders who reduce their SVRs by this amount will be in single figures.
Only Lloyds TSB and Abbey said they were reducing their SVRs by the full amount.
The British Bankers' Association was at pains to stress that the reduction in the base rate would not automatically lead to lower funding costs for lenders themselves.
The problem for lenders is that the key inter-bank lending rate three-month Libor, upon which many variable rate mortgage deals are based, remains stubbornly high.
Yesterday's three-month Libor rate, which was announced before interest rates were cut, was 5.56%, 1.06 points above the base rate before the 1.5-point reduction and a significant 2.56 points above the new official cost of borrowing. This is well up on its typical pre-credit crunch range of between 0.15 and 0.2 points higher than base rate.
It took nearly a full month for October's 0.5-point reduction to be reflected in the three-month Libor rate and there is no reason to expect today's cut will be priced in quickly.
Karen Barrett, marketing director at mortgage adviser website Impartial.co.uk, said: "With Libor rates falling slowly, but not keeping pace with Bank of England base rates, we expect to see very few lenders pass on the full cut to their borrowers."
The current problems in the mortgage market mean many first-time buyers are failing to benefit from the recent house price falls as reductions in the cost of property are being offset by the higher mortgage rates while lenders are also demanding increasingly large deposits.
Many groups now ask for a deposit of at least 15% from borrowers as they look to insulate themselves from future house price falls.
However, yesterday's reduction in the base rate to 3% is good news for the 4.7 million households who currently have either a tracker or a discount mortgage, with most seeing their rate automatically fall by the full amount.
A cut will provide some much-needed relief for hard-pressed homeowners, reducing the monthly cost of a typical £150,000 mortgage by £138 to £887, based on a new rate of 5%.
People who are heavily mortgaged with a £250,000 loan would see their repayments drop by £230 a month, or £2757 a year.
By contrast, homeowners with fixed-rate mortgages, who account for around half of all secured borrowers, will not see a change to their repayments as their mortgage rate is fixed for the term of the deal.
Going forward, some tracker customers will no longer benefit from future base rate changes, despite the fact that their deal should rise and fall in line with the official cost of borrowing.
This is because interest rates have now got so low that some lenders will no longer have to pass on the reduction to customers as so-called "floors" or "collars" will kick in.
A number of building societies have a floor of 3% while Nationwide stops reducing rates for its tracker customers if the base rate falls below 2.75%.
Halifax states in its terms and conditions that it has the option to change its tracker margins if the official cost of borrowing drops below 3%.
The question is whether building societies will lend'
By Catherine Fegan
AS Gordon Mathew stood looking in the window of Clyde Properties, the prospect of becoming a first-time buyer seemed a little less remote.
"If mortgage rates drop in response to what the Bank of England has done, maybe I will finally be able to get on the property ladder," he said.
The 31-year-old from Scotstoun has been renting for the past few years despite pressure from friends and family to buy a house of his own.
Bill Cullens, Clyde Properties managing director, said Mr Mathew could be one of the beneficiaries of the latest attempt to boost the economy.
"Building societies have already started to drop rates in response to the Bank of England move," he said. "The lower interest rates will lead to increased borrowing but the question will be whether building societies and banks will be willing to lend. If they do, hopefully this will lead to greater activity among first-time buyers."
Mr Cullens said a lack of confidence in the housing market had led to a surge in lettings.
"People worried that prices are falling too quickly are renting out their homes instead of selling and moving to the areas where they want to live as tenants," he said.
"For every £1 we lose on buying and selling properties, we have gained on the letting side of the business. There is no great pressure among estate agents and hopefully this latest news will see lenders following the lead and helping more people on the property ladder."
Tom McKenzie, financial services manager for Clyde Properties, said analysts and estate agents were surprised by such a large cut in rates.
"Its been a shock," he said. "I don't think any analyst could have foreseen the Bank of England announcement. I would hope that lenders will follow suit and allow things to loosen up a bit.
"It could mean a more decent deal for first-time buyers who are struggling to get mortgages at the minute. It's a massive step but it needs to be followed up by similar action from lenders."
