Just how low can my tracker mortgage go?

A decision by Nationwide Building Society not to pass on future interest rate cuts to its 250,000 tracker mortgage customers has upset borrowers who were hoping to see their repayments shrink further.

They will be especially disappointed if the Bank of England cuts the base rate from the current 2 per cent at its monthly meeting tomorrow.

Nationwide isn’t the only lender to refuse to pass on further base rate cuts to tracker customers — Norwich and Peterborough, Yorkshire and Skipton building societies have also set a “collar” on how low their tracker rates will go.

The key attraction of tracker mortgages is that, supposedly, they are guaranteed to move up and down in line with base rate changes. So how can these lenders get away with it?

The answer, as ever, lies in the small print. Nationwide states in its tracker mortgage key facts illustration (KFI), which lenders must give every new borrower, that it won’t pass on any base rate cuts below 2.75 per cent. Skipton, Yorkshire and Norwich and Peterborough building societies have set their tracker collars at 3 per cent.

And there is nothing borrowers can do about it, says Andrew Montlake, partner at mortgage broker Cobalt Capital. “Nationwide has clearly stated this collar in its KFI. Unfortunately, many borrowers won’t have paid this much attention when they took out their mortgage, because nobody expected base rates to fall as low as they have.”

Nationwide did pass on December’s 1 per cent base rate cut in full to tracker customers, even though it wasn’t obliged to do so under the terms of its contract. But it now says it can’t afford to pass on future cuts because it needs to protect savers.

Lenders have to strike a balance between how much they charge borrowers and how much interest they pay to savers, Montlake says. “Banks and building societies are keen to attract savers to bolster their balance sheets, and can’t afford to cut rates too low.”

Yet there is no guarantee that savers will benefit, with rates paid on deposit accounts continuing to fall even lower.

Nationwide already pays as little as 0.85 per cent on its InvestDirect postal account and 0.1 per cent on its CashBuilder accounts. And it has refused to rule out cutting savings rates further if base rates drop on Thursday, so both borrowers and savers could end up losing out.

The estimated 550,000 homeowners with Halifax tracker mortgages have been luckier, says Ray Boulger, of mortgage broker John Charcol. “Halifax set its collar at 3 per cent but removed the details from its KFI three years ago. Now it says it won’t enforce this collar. If you have a tracker with the Halifax, you should consider yourself lucky.”

Tracker customers with other banks should also see their mortgage repayments fall if the Bank of England cuts base rates tomorrow.

Barclays, Lloyds TSB, Northern Rock, Alliance & Leicester, Woolwich, RBS and NatWest have no collar on their mortgage products, while Abbey sets its floor at just 0.0001 per cent. HSBC reserves the right not to pass on rate cuts to customers but says it has no plans to enforce this.

“With every lender operating different rules, this underlines the importance of checking the small print when taking out a new mortgage in future,” Boulger says.

He says banks may be slightly more generous about passing on future base rate cuts than building societies. That’s because building societies are obliged to raise at least 50 per cent of their mortgage funds from savers, whereas banks can rely more heavily on other options, such as the money markets.

If base rates drop to 0 per cent by the middle of this year, as several analysts predict, some lucky borrowers could end up paying near-zero rates on their mortgage, says David Hollingworth, broker at London & Country Mortgages.

He says: “C&G and Woolwich previously offered trackers charging just 0.17 per cent over base rate, with no collar. Borrowers lucky enough to have one of these deals currently pay 2.17 per cent. If base rates hit 0 per cent, their mortgage rate will fall to just 0.17 per cent.”

Some borrowers could, in theory, be paid by their lender for having a mortgage.

“C&G previously offered a tracker at 1.01 per cent below base rate. If base rates fall below 1 per cent, the pay rate will fall below

0 per cent. In practice, C&G says it will cut its rate to 0 per cent but no lower.”

Lenders are now protecting themselves by either withdrawing their trackers or charging hefty arrangement fees.

“Alliance & Leicester offers a tracker at 1.49 per cent above base rate for two years but with a 2 per cent arrangement fee,” adds Hollingworth. “That would cost £3,000 on a £150,000 mortgage. Abbey offers 1.99 per cent over two years but with a £1,995 fee.”

Hollingworth says First Direct offers the most competitive tracker, charging 1.49 per cent over base rate for life, which means you currently pay 3.49 per cent. It charges a £599 arrangement fee and will lend up to 80 per cent of property value.

Lenders have also been condemned for failing to pass on recent base rate cuts to millions of borrowers on their standard variable rates (SVRs).

But several now have no choice but to pass on future cuts. “Nationwide and C&G are obliged to pass on all base rate cuts, because they promised their SVRs would never go higher than 2 per cent above base. Both currently charge 4 per cent and will have to pass on future reductions,” Hollingworth says.

Halifax pledges its SVR will never be more than 3 per cent above base. It is now 2.75 per cent above base rate, so it must pass on all future cuts above 0.25 per cent.

So tracker and SVR borrowers will benefit from falling base rates but many by less than they had hoped.