Anyone with a mortgage would vote for the Bank of England's base rate reductions to be fully passed on by lenders to borrowers but this could be a shortsighted demand with negative consequences in terms of the long-term viability of a lender's products. As such, it could threaten product innovation and consumer choice in the future.
Many economic experts never had a problem with lenders operating autonomously – critics would say secretly and unpredictably – in the heady days when the cartel of big lenders agreed a common variable rate, sometimes irrespective of the Bank of England's rate movements.
The old regime gave lenders greater financial latitude which enabled them to manufacture mortgages which were competitive but which could not bankrupt the bank.
Do-gooders such as consumer groups argued that margins should be transparent, that lenders should always fully pass on base rate reductions and that lenders should accept loss-leading products which might never return a sensible profit.
Today's market sees lenders under immense commercial pressure to pass on all or most of the Bank of England's rate shifts, almost regardless of the profitability of the mortgage account. Arguably, this would be more equitable for consumers but could undermine the lender's pricing model, such that many lenders resist passing on full rate cuts despite the pressure to do so.
Are consumers' interests protected, given than lenders need not pass on rate cuts? One lender senior manager thinks they are. He says: “Competition for new borrowers among mortgage lenders in the marketplace is so intense that lenders will have to be sure their business plans can quickly adjust to environmental changes. To a large degree, rate adjustments will inevitably reflect market trends and competitive pressure always features. Bank of England rate reductions almost certainly exert sufficient pressure to move lenders' rates, to the ultimate benefit of new borrowers.”
So new borrowers do tend to benefit. Several pundits point out, however, that there is less pressure as an outcome of Bank of England decisions to adjust interest rates applicable to the existing borrower. Increasingly, though, the staggering volume of remortgage business sends powerful signals to lenders that undervalued customers will not stick around and tolerate mediocre variable rates.
Abbey National's Peter Nicholson says: “In general, we now enjoy the lowest mortgage rates of a generation – proof, if proof were needed, that no lender can completely ignore a Bank of England reduction.”
The official position of lenders on the subject of passing on rate movements tends to include some halo polishing.
Woolwich head of mortgage products Andy Gray points out that his firm follows the lead set by the Bank of England monetary policy committee when it changes the base rate and places its mortgage rates under review. He says: “The mortgage market is highly competitive and we need to take into consideration the dynamics of the market as a whole when setting rates while also ensuring we offer our customers a range of mortgage products to suit their needs.”
I agree with his sentiments that lenders need to sustain a safe margin but cannot afford to resist rate reductions due to massive competitive pressure. A lender refusing to pass on reductions does so at the significant risk of speedily losing market share.
For many borrowers, the major contention in years gone by was that the lender could mess around with the variable rate to its heart's content while the borrower had no idea of the likely exposure. It was a good academic objection, which probably gave rise to tracker products.
Gray says: “Increasingly, customers are looking for mortgage products that offer guarantees and the Woolwich offers one of most competitive lifetime tracker mortgages on the market that guarantees to track the base rate plus 0.85 per cent – a current rate of 4.35 per cent.”
Our view and experience is that take-up of tracker products is extremely low, accounting for fewer than 4 per cent of UK sales. Perhaps consumers did not need that lender pricing transparency as much as they said they did.
Robert Clifford is managing director at national broker franchise mortgageforce