Jeni Browne, consultant mortgage broker looks at the different variable rates available on the market and explains why not all of these will be affected by Bank Rate.
There are three main types of variable rate mortgage – when I say variable, I mean a rate which is not fixed and thus can move up or down at any time.
Base Rate trackers:
These rates are linked directly to the Bank of England Base Rate – therefore they will reduce by 0.25 percentage points in line with the recent reduction to Bank Rate. Although, it is worth bearing in mind that some lenders do have a minimum interest rate (floor) on their mortgage contracts so if you don’t see an immediate reduction in your rate, it could be that the lender has one of these written into the small print.
Track the London Inter-Bank Offered Rate – this is not linked to Bank Rate so you will not see an automatic reduction in your mortgage payments.
Lender’s standard variable rates:
These rates track a standard interest rate set by the lender. The lender has discretion over this rate and is under no obligation to reduce it.
After the news of the Bank Rate reduction we carried out a quick poll on lenders to see if any would be reducing their standard variable rate any time soon.
Four of the lenders came back to us and said they would be reducing their standard variable rate on September 1st – no great shock as these lenders link their SVR to Bank Rate.
Several lenders who link their SVR to LIBOR have come back and said they won’t be making any changes to their rates based on the Bank Rate reduction but will review their rates in accordance with LIBOR – pretty understandable.
However, there are some lenders who don’t link their SVR to LIBOR or Bank Rate. Of those who came back to us only one lender (well done Coventry!) has said it will be passing the 0.25 percentage point reduction onto borrowers.
The rest are going to ‘wait and see’. I’m sure Mr Carney would be impressed with those banks…
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