It is an unfortunate situation for hundreds of thousands of homeowners in Britain, but they are likely to remain stuck on pricey variable rate mortgages just at a time when the Bank of England has again cut interest rates, making it easier than at any time in recent memory to obtain a cost effective mortgage.
In fact, many of the variable rate mortgages that some borrowers have been lumped with cost as much as 400% more to service than some of the best fixed rate deals available now that the Bank of England has slashed interest rates from 0.5% to 0.25%.
However, there is still hope for some that banks will take a sympathetic approach to those saddled with the more expensive variable rate mortgages by passing on the Bank’s savings. Mark Carney, the Bank of England’s governor, certainly hopes that lenders will take this approach; he has called for banks to do the right thing, saying that there can be “no excuse” for banks not to pass on savings to borrowers.
In fact, Carney has gone out of his way to ensure that banks pass savings on to consumers. So much so that he has created a £100bn funding scheme for banks in order to help them absorb the impact to their profits.
Unfortunately though, only a fraction of lenders have so far heeded the governor’s advice by passing their savings onto borrowers – Halifax, Bank of Ireland and Yorkshire Building Society are all yet to do anything to provide their existing borrowers with better deals, while Lloyds Banking Group remains, at the time of writing, the last high street lender to pass on savings. Indeed, a quick look at history hardly creates optimism that banks will put borrowers out of their misery; over the past three decades very few lenders have been quick to significantly alleviate the financial hardship of those on variable rate mortgages.
But the situation in 2016 is particularly pronounced. For example, a two-year fixed rate mortgage currently costs less than 1% annually to service, in contrast to the 5% paid by the typical variable rate mortgage customer. To make matters worse, many variable rate mortgages are not tied to the official Bank of England rate, meaning that lenders are not in any way obliged to pass savings on. The end result? Well, for many it may be as much as several additional hundreds of pounds a month in mortgage repayments that it would otherwise be unnecessary to pay. Despite the Bank of England’s favourable rates it seems there is little chance that variable rate mortgages will any time soon match 2009’s historic low of 3.82% – which at the time was even lower than the fixed rate.
And unfortunately for those who would most benefit from the savings – for example, those with an unfavourable credit history – it may be hard to gain approval to switch to a cheaper deal; a cruel and paradoxical side-effect of the new and more stringent “affordability” regulations. The situation is further compounded for those who have only minimal equity in their homes, such as those homeowners whose property lost value during the 2009 market crash.
For those who are able to switch from a variable rate mortgage to a fixed rate deal, there has rarely, if ever, been a better time to remortgage, even if their bank has promised to pass on the Bank of England interest rate savings. There are loads of deals out there for the discerning borrower, with some starting at as little as 1% for two years.
It certainly seems that some banks are using their variable rate mortgages to offset the reduced cost of fixed rate deals. For example, the typical two-year fixed rate deal costs just over 1.7%; significantly cheaper than the typical variable rate deal.
Of course, there is a flipside for savers. Former pensions minister Ros Altmann told The Guardian that the rate cuts are “unlikely to really help the economy but will certainly hurt prudent savers”.
Adding, “Ordinary people who need to save for a rainy day or even for their retirement – and those older people who have saved for years in order to enjoy a better later life – have lost out significantly and many of them are more likely to reduce their spending than increase it as a result of receiving lower interest rates. That surely runs counter to the intentions of the policy,”
As ever, it is a case of swings and roundabouts. Whatever the case, it is a good idea for borrowers to evaluate all their options so that they can find the best deal available to them. Find out more about variable mortgages here.