surviving the recession

We’ve had a spate of interest rate cuts - The bank base rate was 5.75% in July 2007. The Bank of England then started to cut the base rates in December 2007 in stages of 0.25% reaching a base rate of 5% by April 2008. However banks like HBoS only passed on 0.25% of the 0.75% interest rate cut to some of it’ customers (eg from it’s Intelligent Finance sub-division), saying they would pass on the rest once the credit crunch was over.

The Bank of England then cut base rates by 0.5% in October 2008 to take the rate to 4.5% (this cut was passed on) and then cut rates by 1.5% in November - some banks passed this on, others like HSBC only passed on 0.81%. The Bank cut again on 4th December by another 1% to reach a base rate of 2% - but while HSBC and others passed on this cut, banks like HBoS and RBS have said they will only pass on 0.25% of the cut.

This means that of all the cuts since last December 2007, HBoS has not passed on 1.25% (in other words they have expanded their margins by a total of 1.25%). This is a lot of money - for an average mortgage of £80,000 this is about £83 per month the borrower is losing out on.  

What to do if you are a customer? Normally the advice would be to remortgage. However most remortgage deals now come with such high arrangement fees that it’s a waste of money moving your mortgage.

However there is another option. If you are on a standard variable mortgage rate, chances are that your mortgage allows you to make capital repayments at any time. Check the terms of your mortgage. If you are allowed to make repayments, then do so as fast as possible. They can only charge you interest on the capital outstanding, so the quicker you pay it down the less interest you pay and the cheating lenders will lose out on making a profit on you.

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