We know the main question will be "will lenders pass on any Bank rate cut to mortgages?". The wording of the question implies that lenders themselves automatically benefit from any cut in Bank rate, when in fact they don't.
The real cost of funds to lenders is determined not by the Bank base rate, but by their own cost of borrowing. And their cost of borrowing depends on what they need to pay to savers to attract deposits, as well as how much it costs them to borrow from other banks or the money markets, and the costs of holding capital and sufficient liquidity (both of which have heightened importance in the current market environment). The cost of borrowing from other banks can broadly be gauged by 3-month LIBOR, which in recent years sat within a range of between 0.15% and 0.2% of Bank rate but is now 1.2% above it. Also, in the past, if base rates were expected to fall this would usually be priced in by the markets in advance.
So, it does not make commercial sense to insist or expect that lenders automatically "pass on" cuts in Bank rate to borrowers (other than those with Bank rate tracker mortgages) unless and until the cut flows through to an equivalent reduction in their own funding costs. Even then, it's important to allow for the fact that in the post-credit crunch environment, where Government and regulators expect lenders to operate lower-risk and higher-capital lending businesses, the pricing of mortgages relative to benchmark rates is highly unlikely to return to the very narrow margins of the pre-crunch era. And lenders will need to take account of the possibility of higher provisioning and losses in an environment of higher arrears and possessions. A decision not to follow a base rate reduction does not imply that the lender is "profiteering".
Because of this market dislocation, we are not attaching our usual ready reckoner table on how a notional cut in mortgage rates would affect monthly payments on various size mortgages - but we are giving you some useful Bank rate/LIBOR/deposit rate comparisons below. You can still request the table from us and we'll be happy to give it to you - but we don't want to feed the misleading impression that a Bank rate cut automatically means a mortgage rate cut.
Before the credit crunch, it used to be a pretty reasonable working assumption that lenders would "pass on" cuts when the Bank rate was a reasonably good proxy for a lender's cost of funds. But that simply isn't the case at the moment, and we don't want to imply that it is.
Mortgage Introducer comment.
If the banks are lending at a commercial rate now to customers then surely they will make a substantial gain by not passing the rate cuts on. The CML says the interest rate reduction is priced into the market ahead of the actual cuts, but do we really believe that?
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