The MPC has 2% more to play with

Following the cut in Bank Rate today by the MPC of 1%, Ray Boulger of John Charcol, the UK's leading independent mortgage adviser, comments, "Last month's Quarterly Inflation Report highlighted a sea change in inflation expectations and all the subsequent statistics show the economic situation continuing to deteriorate rapidly. These factors all supported the need for another substantial Bank Rate cut and, having recognised that, the MPC clearly saw that the sooner the cut was made, the quicker its impact will be felt.

"A key factor deterring the MPC from cutting Bank Rate by more than 1.5% last month was uncertainty over the impact of the Pre-Budget Report and in particular the scale of the anticipated tax cuts. With the PBR announced and no real radical changes made to impact their decision, this left the MPC free to act decisively this month."

SVR's - a world of difference...

"The smallest cut in response to the total combined 2% cut in Bank Rate in October and November was 0.3% from Scarborough Building Society and there is now an unprecedented spread of 2.25% between the lowest and highest Standard Variable Rate (SVR), with Nationwide being lowest at 4.69% and Scarborough (soon to be taken over by Skipton) highest at 6.94%. While borrowers may have received the news of another significant rate cut with hope, I expect very few lenders to pass on the whole of this month's cut, with most reducing their SVRs by between just 0.25% and 0.5%. Some who were coerced by The Government into passing on all of last month's 1.5% cut against their better commercial judgement may choose to be parsimonious this time, unless there is further Government browbeating."

Will your collar get felt?

"This will be the first time a significant number of borrowers on a tracker mortgage will feel the impact of a collar. I estimate that out of about 3.9m borrowers with a tracker mortgage 500,000 - 600,000 will not see the full benefit of this cut, and some will see no benefit. A similar number with a Halifax tracker will have to wait to see whether Halifax exercise the option contained in their Terms and Conditions to not pass on Bank Rate cuts below 3%. However, Halifax will have to be able to justify not doing so as their Terms and Conditions include the proviso that ‘any such change will be made for a valid reason or reasons.' With so many borrowers affected I suspect that if they exercise this option there will be a legal challenge.

"Another key influence will be that after pressure from the Financial Services Authority (FSA) in mid 2005 to reduce the number of pages in their Key Facts Illustrations (KFI), Halifax removed all reference to the collar from their KFIs and buried it in the Terms and Conditions booklet which borrowers don't see until they get their mortgage offer. In his speech to the Council of Mortgage Lenders Annual Conference this week FSA Managing Director of Retail Markets, Jon Pain, in a barbed comment obviously aimed at Halifax, said ‘tracker interest rate floors can be a legitimate term of a mortgage, but only if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial KFI and offer document throughout the sales process. If it is not you run the real risk of both breaching our disclosure requirements and having an unfair contract term you can't enforce.'

"Despite their protestations to the contrary the FSA must arguably shoulder some of the responsibility for the terms of the Halifax collar not being clearly spelt out to borrowers.

"In view of all these considerations, plus the fact that Halifax is now effectively controlled by the Government, I expect them to pass on the full Bank Rate cut to their tracker customers."

What should borrowers do now Ray?

"Despite the cost of fixed rate mortgages falling further over the last month they still look expensive, especially as Bank Rate is very likely to fall further. Therefore trackers with a droplock option but no collar remain the ideal mortgage product in today's market, although borrowers needing in excess of 75% loan to value (LTV) will find very little choice, and none above 80% LTV. For those, you need to speak to an adviser to se what the best option for you is."