Interest rate latest: Darling summons the bank bosses we bailed out to force them to pass on 1.5% cut to homeowners

By Becky Barrow, Johnathan Prynn and Niall Firth

Last updated at 11:16 AM on 07th November 2008

Alistair Darling: The Chancellor has urged lenders to do the decent thing

Alistair Darling hauled bank chiefs into a meeting this morning as he urged them to pass on yesterday's interest rate cut to homeowners.

The heads of all major high street lenders were summoned to a breakfast meeting at the Treasury at which they were told to drop mortgage rates 'as quickly as possible'.

Lloyds TSB and Abbey have both already announced that they will pass on the full 1.5 per cent cut to their mortgage customers.

But many other major lenders have said they are still reviewing the situation before making a decision.

Within hours of the Bank of England cutting its base rate to just 3 per cent, lending giants had turned the screw by axing their best mortgage offers.

David Cameron today urged the Government to force nationalised banks - Northern Rock and Bradford & Bingley - to lower their rates.

On GMTV this morning, Tory leader David Cameron said: 'The interest rate should be passed on. If they do not, further action may be necessary.'

He added: 'The Government owns some of these banks now, so they can take steps.'

And at a Downing Street press conference this morning Gordon Brown said he was 'determined to get banks to resume lending'.

But lenders can also use small-print clauses to stop passing on cuts on tracker mortgages, experts warned today.

These so-called ‘collars’ will fuel criticism of banks for not passing on the full benefit of the shock 1.5 per cent base rate cut in their standard variable rates.

The collars written into the terms of tracker deals will come as a shock to many borrowers, who were looking forward to further big falls in their mortgage bills.

The Nationwide collar is automatically triggered when the base rate falls to 2.75 per cent, which many City economists believe could happen as soon as next month.

The Halifax collar comes into force at three per cent, but the former building society has the discretion not to invoke it and said it had not yet decided.

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All three banks withdrew their tracker mortgages yesterday

Three smaller lenders, Skipton Building Society, Yorkshire Building Society and its subsidiary Accord, also have collars at three per cent base rates.

Some borrowers with the Chesham, Earl Shilton and Darlington Building Societies have already been caught by the collars, according to mortgage expert Ray Boulger of brokers John Charcol.

Some other bigger lenders, including HSBC, have small-print terms that give them the right to stop cutting tracker rates 'if there is a material change in the mortgage market'.

Bank customers have been angered by the high street banks' slow reaction to base rate cuts after three were bailed out with up to £37 billion of taxpayers' money.

John McFall, chairman of the Commons treasury Committee, said: "These guys came in with some pretty big begging  bowls asking for taxpayers' money. They are displaying an alarming lack of social conscience."

There are few immediate winners among existing borrowers, either. Around half the UK's 11.74million mortgages, 5.99million, are on fixed rates, so the Bank's move has no effect on them.

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Even nationalised lenders like Northern Rock and Lloyds quickly pulled their best deals in the wake of the Bank's historic cut

The two million borrowers on standard variable rate mortgages should see payments fall £138 a month on a £150,000 loan – but only if the cut is passed on in full.

The only guaranteed winners are the 3.17million people already on tracker deals, who should benefit by around £130 a month on £150,000.

Savers, many of them hard-pressed pensioners, will be badly hit. Interest rates have crashed to as little as 0.1 per cent on many accounts, equal to just 80p a year, after tax, on £1,000.

Just like the good mortgage deals, popular savings rates were axed in their droves yesterday. The Bank said its move had been triggered by the worst financial crisis 'for almost a century'.

In a sign of its powerlessness in the face of a global financial tsunami, it warned that the credit crunch will not be solved by the cut, admitting: 'The availability of credit to households and businesses is likely to remain restricted for some time.'

Yesterday's stunning move – the biggest cut for nearly 30 years – was described by economists as 'shock and awe tactics'.

But his words had a hollow ring on a day when:

• The International Monetary Fund predicted that Britain's recession will be the 'steepest' of leading Western economies;
  

• New figures showed house prices falling at their fastest since records began, down 15 per cent over the last 12 months;
  

• The FTSE 100 index dropped nearly 6 per cent to 4,272, wiping around £62billion from the blue-chip index;
  

• Downing Street even hinted at tax cuts in yet another effort to stimulate the economy.
  

Tracker mortgages are the best deals at a time when bank rate is falling, as they drop when it is cut.

But by last night Halifax, Nationwide, Royal Bank of Scotland, Abbey, Woolwich, Lloyds TSB, Alliance & Leicester and several small building societies had axed all their tracker offers.

HSBC cut all but one. One reason for the lenders' lack of positive action could be that they were as surprised as almost everyone in the City at the scale of the rate cut.

But the main problem is that many variable rate mortgage deals are based on the key inter-bank lending rate Libor, which remains stubbornly high.

Yesterday's three-month Libor rate, announced before the Bank's decision, was 5.56 per cent, 1.06 per cent above the old base rate. Last month, when the Bank cut half a percent from base rates, more than 70 per cent of lenders failed to pass on the full cut.

Analysts and opposition politicians said it was 'very clear' that the Government has failed to ensure the banks help homeowners in return for the bailout.

Lib Dem Treasury spokesman Vince Cable said: 'It is very clear that the conditions attached were far too lax'.

Melanie Bien, of mortgage broker Savills Private Finance, said: 'Borrowers will be outraged that rates on new trackers are set to rise so soon after a substantial base rate cut.

'They may well think that lenders are profiteering, although lenders would argue that interbank rates have not fallen by the same amount so the cost of borrowing for them is higher than base rate.'

Shadow Chancellor George Osborne said the extent of the cut underlined the serious economic trouble ahead.

He said: 'This is a shot in the arm for the economy, but it shows how sick the patient is.'

Doug Taylor, personal finance campaigns manager at Which?, said: 'If the banks fail to pass on the base rate cut, it will be another slap in the face for mortgage customers, many of whom are struggling to make ends meet.

'To add insult to injury, the banks will no doubt be falling over themselves in the rush to cut savings rates.

'All the banks, particularly those who have benefited from taxpayers' money, should be passing on any base rate cuts in full.'

WHAT THE INTEREST RATE CUT MEANS FOR YOU

While some borrowers will feel the full effect of the 1.5 percentage point cut in base rate immediately, it is savers who will be the hardest hit. Here's how yesterday's cut could affect you.

BORROWERS

Tracker rates: These borrowers are the immediate winners. Their repayments will tumble by £130 a month, for those with a typical £150,000 mortgage. Just over a quarter of outstanding mortgages are trackers.

However, not all will benefit. Smaller building societies have already placed a floor on the rate some will pay: 4 per cent for those with Earl Shilton and 3.5 per cent with Chesham Building Society.

Standard variable rate: Customers with Lloyds TSB have already had the full cut passed on – reducing their repayments by £130 a month. Those with other banks and building societies will have to wait.

Fixed rates: Borrowers will not see any change in their repayments.

Discount rates: These are linked to a mortgage lender's standard variable rate. The amount repayments will fall depends on how much of the rate cut the lender passes on. Lloyds TSB, which has passed on the full cuts, does not have any discount mortgages.

SAVERS

Isas: Savers without a fixed rate face seeing their return plummet by £150 a year for someone with a £10,000 balance.

High Street accounts: Some pay such a paltry rate of interest that the full 1.5 point cut cannot be passed on. Abbey, Halifax and Barclays already pay less than 1 per cent interest on some accounts.

These rates could fall as low as 0.1 per cent, giving savers just 80p a year after tax on every £1,000 invested.

Pensioners with £50,000 in their account would see their income drop by around £62.50 a month.

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