Your mortgage should have got cheaper. But you could miss the cut

Up to a quarter of the UK's mortgage lenders may not pass on the full quarter-point interest rate cut announced by the Bank of England last week, industry insiders have told The Independent on Sunday.

"There have been signs that a substantial minority of lenders, perhaps as many as one in four, may not cut their mortgage rates, or alternatively will only pass on a proportion of the reduction to borrowers," says Ray Boulger, technical director at mortgage broker Charcol. This compares to the long-term norm of around one in 10 lenders failing to follow a downward move in the Bank base rate.

The credit crunch, he adds, is the reason. "Libor rates [the interest on loans between banks] are still around a quarter of a percentage point above where they should be. As a result, I expect a sizeable minority to look to hold back on passing on the full cut as they rebuild their reserves."

On the day of the rate cut, in an unheard-of show of solidarity, all but one of the top 10 biggest lenders lowered their standard variable-rate (SVR) mortgages. But according to Mr Boulger this had the whiff of a PR smokescreen and is unlikely to be followed among the smaller lenders.

"I have never seen this before. I can only presume that the Government has had a word or there has been co-ordination."

But the cost of cutting SVRs is not large for the major lenders. "Many of the mortgages offered by the big banks, such as the Halifax and Woolwich, are not linked to their SVR," says Andrew Montlake, partner at mortgage broker Cobalt Capital. "This means they can cut and it doesn't make much difference to their bottom line." In fact, some of the top 10 lenders have fewer than one in 20 mortgages linked to SVR.

Instead, a large proportion of the mortgage lending at the major banks is done on a tracking basis, which means rates move in line with the ups and downs of the money markets. And this may spell trouble for borrowers, says Melanie Bien at broker Savills Private Finance. "Due to the credit crunch, a disconnect has developed between the Bank base rate and tracker rates. So the quarter-point cut is unlikely to feed through to some mortgages at present."

Mr Boulger reckons the bulk of the lenders choosing to hold back from cutting their SVR will be among the smaller building societies. Significantly, very few of these followed the lead of the big lenders and cut rates following the Bank's announcement. "Traditionally, they have offered a lot of discounted mortgages that are linked to SVR, which means it is quite expensive for them to lower their SVR rates. I expect a substantial number of building societies will choose to cut by 0.15 or 0.2 per cent rather than the full 0.25 per cent."

If this happens, the societies will be acting true to recent form. A scan of the lenders that failed to pass on the last rate cut in December shows the vast majority were building societies. "As a result, the Bank of England is going to have to cut rates by more than it would normally have to in order to get lenders to pass on mortgage cuts big enough to boost consumer spending and help the economy," says Mr Boulger.