Mortgage lenders fail to pass on flatlining interest rates

Just 5 per cent of lenders have passed on the lower Bank of England base rate in full to borrowers on their standard variable rate (SVR) mortgages, research published today reveals.

The average SVR is now 3.48 per cent above the base rate, compared with a 1.95 per cent margin in September 2008, when interest rates were at 5 per cent.

More than one in five lenders have raised their SVR since the last base rate cut to 0.5 per cent in March 2009, according to Which? Money.

High SVRs leave households at risk of difficulties when interest rates eventually rise, assuming lenders pass on higher rates in full. A 0.5 per cent increase would add 43.80 to the monthly payments on a 150,000 mortgage with the average 4.8 per cent SVR. Homeowners on the same deal would see their repayments go up by almost 90 a month if the base rate rises by 1 per cent, adding to the growing strain on household finances.

Peter Vicary-Smith, chief executive of Which?, said: "Millions of people are on variable rate mortgage deals and for many a rate hike could mean they're facing real financial difficulties.

"Banks have enjoyed increased margins on mortgages for the last few years and when the base rate rises again, few lenders will be able to justify passing the full amount on to SVR customers."

The six lenders with the highest SVRs are all building societies, led by KRBS (formerly Kent Reliance) with a 6.08 per cent SVR. Of the lenders owned by the four biggest banks, just Cheltenham & Gloucester and Lloyds TSB Scotland have passed on the full base rate cut to customers.

But Michael Coogan, director general of the Council of Mortgage Lenders, hit back, arguing that market conditions have changed since 2009.

"Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2008. But this apparent historical relationship has been blown apart by the move to an unprecedented low base rate since March 2009."