Banks Take Cut Out Of Interest Rate Drops

By: Robert. Wood

People thinking of re-mortgaging to enjoy the savings brought by recent interest rate cuts may be in for a nasty surprise.

The Bank of England cut interest rates by 0.25 per cent in December, and is widely predicted to make another 0.25 per cent cut on February 7.

"A quarter-point rate cut on Thursday looks pretty much a done deal in the face of tightening credit conditions," said Andrew Smith, chief economist at KPMG. "Further rate cuts are on the cards - but not until more concrete evidence of a slowdown emerges."

Interest rates are now at their lowest since 2005, and current economic conditions mean further decreases are likely over the remainder of this year.

So people coming to the end of cheap fixed-rate deals may well feel that now is a good time to re-mortgage and benefit from the lowest interest rates for three years.

However, many of Britain's biggest lenders have been sneaking up the cost of their tracker mortgages in recent weeks.

Some have increased prices by as much as 0.45 per cent, meaning that people re-mortgaging off cheap deals taken out two years ago will pay up to £900 a year more.

This means that new borrowers will see little benefit from this weeks expected rate cut.

"It is worrying that lenders are raising their rates at a time when financial market conditions appear to be easing," said Vicky Redwood, an economist at leading fiscal consultancy Capital Economics. "This suggests that the need to recoup losses from the credit crunch continues."

It has been estimated that banks and building societies will make around £25 million by raising their trackers in this way.

A Bank cut this week would mean that trackers will come down again to pre-increase levels, but that none of the savings made by banks will be passed on to customers.

"Contrary to Alistair Darling's call to lenders to pass on the full effect of rate cuts, this totally eradicates the effect and renders it totally worthless to many borrowers," said Katie Tucker of online broker Charcol.co.uk. "I suspect lender will be reluctant to pass on any Bank rate cut moving forward."

So what is the best course of action for the estimated 1.4 million people about to come off cheap two-year fixed term deals?

The best advice is to act fast. Many lenders have already either pulled their cheapest deals, or put up rates as they struggle to cope with the number of applications they have received.

Leeds Building Society, Halifax and Bristol & West all withdrew a range of home loans last week, and it is likely that others will follow.

The best tracker deal on the market at the moment is with Co-op, which offers a rate 0.01 per cent below the Bank of England base.

With tracker margins being pushed up, many borrowers will find that they are better off with fixed-rate deals though.

As with all financial products, shopping around is the key. Always remember to look out for early redemption charges however, as with tracker deals with no extended tie-ins are increasingly rare.

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