Read the small print!

Falling base rate should help to reduce mortgage interest rates and bring some relief to borrowers who are feeling vulnerable with negative equity and rising unemployment threatening them. But those who took out ‘tracker’ mortgages in 2007, when mortgage lenders were still caught up in the race to lend to as many people as possible, may find themselves in the bizarre position that their banks are paying them, if base rate falls any further.

A report on the BBC news website explains that tracker mortgages fixed a level of interest at a set amount below the Bank of England base rate – it shows how desperate those banks and building societies were to lend at all costs, as 33 different lenders offered 83 varieties of these loans as ‘loss leaders’ in order to attract customers. While most offered deals of 0.1% or 0.3% below base rate, some were as much as 1.0%, while the Cheltenham & Gloucester, part of Lloyds TSB, had one mortgage offer at 1.01% below bank rate. Could that mean that a further reduction in base rate to 1% or below, which has not been ruled out by the Bank of England, would mean that C&G end up paying interest to their customers on their tracker mortgages? This seems particularly intriguing as Lloyds TSB is now part-owned by the government, who could be set to step in and guarantee mortgage lending under a plan being discussed this weekend according to another report today. The prospect of paying interest to borrowers must have sent the legal departments of the banks and building societies working through the small print of the contracts to see what they can to do avoid this, and the Financial Services Authority so far has not decided on a definite policy as no lenders or borrowers have yet reached this intriguing position, but Ray Boulger of mortgage brokers John Charcol is sceptical that many lenders will be able to rely on their paperwork to fend off customers:
“Many have a clause in the small print but I don’t think that they will stand up if they were not shown in the key facts when the mortgage was arranged,” he argues.