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Cut and thrust

High-street lenders have come under fire for raising tracker rates in anticipation of last week’s sharp fall in the base rate.

Lloyds TSB, Abbey, Nationwide, Woolwich, Halifax and Northern Rock all raised tracker rates by as much as 0.5 per cent in the run-up to Thursday’s meeting of the monetary policy committee which saw the base rate slashed by 1.5 per cent to 3 per cent. This followed similar increases of up to 0.5 per cent in tracker rates in October.

The Government said it was unhappy with lenders’ behaviour. Prime Minister Gordon Brown said he was disappointed and urged lenders to pass on the base rate cut in full.

Business Secretary Peter Mandelson also hit out at the banks, telling the BBC’s Today programme: “If it appeared that the banks were standing in the way between what the Government is doing and how the public wants to benefit, then many banking customers are going to be asking some difficult questions of the banks.”

Lenders have been quick to defend their position by pointing out that the cost of bank borrowing is still high. A Council of Mortgage Lenders spokesman says: “The real cost of funds to lenders is determined not by the bank base rate but by their own cost of borrowing. This 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.

“The cost of borrowing from other banks can broadly be gauged by the three-month Libor which is now 2.7 per cent above base rate. It does not make commercial sense to insist or expect that lenders pass on cuts in the bank rate automatically to borrowers. A decision not to follow a base rate reduction does not imply that the lender is profiteering.”

Moneysupermarket.com head of mortgages Louise Cuming says: “A fascinating battle is taking place with lenders lining up against the Government. On one side, the Chancellor has asked lenders to continue to lend and on the other, the lenders want to do anything but lend.”

How can this stalemate be explained to an angry public who have not only been hit by rises in new mortgage rates but have seen £37bn of taxes handed to the banks raising rates?

Nationwide group director Matthew Wyles says: “We are asking the man on the street to grapple with the complexities of debt capital markets. This problem is all about the three-month Libor and people have to get their heads round that.

“It is very hard to even find three-month Libor rates on Google, so we are expecting people to try and understand something they cannot see. It should be as easy to see three-month Libor rates as it is to see sterling exchange rates.”

Lloyds TSB says that it recognises the need for an economic consultation with borrowers and that it is doing all it can to bring economic lessons into the sales process.

A spokeswoman says: “We do a lot now to educate people on the Libor and base rate relationship and we have taken part in interviews that explain what could happen if rates change. We are putting words like swaps and Libor into our press releases which would have been unheard of a year ago.”

Advisers are seeing a gradual recognition by clients that trackers may not follow base rate falls.

The Mortgage Practitioner principal Danny Lovey says: “I just tell the truth. People find it very frustrating. You just have to tell them it is a bizarre situation but that is how it is.”

Halton Insurance Services director Mike Fry says: “We just try and explain the situation and I think Joe Public is slowly beginning to understand. Previously, they had an ostrich mentality but now people are waking up. We explain that lenders will not be lending at 3 per cent, it just is not going to happen.”

Legal & General head of mortgages Ben Thompson says the battle between lenders and the Government will abate in time as markets slowly improve. He says: “It is a confidence crunch now, not a credit crunch. I have got some sympathy with lenders because the reality is that there need to be affordable mortgages available but what is the price?

“Once you get the chance to paint the full picture, it is very understandable what is going on. All this needs to shake out and wash through. Eventually you can see out the other side – more products, more sensibly priced to risk, sensible criteria and a gradual move towards easier, more liquid lending but not to where we were in 2007.”

For more mortgage news, go to moneymarketing.co.uk/ mortgages

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