Page last updated at 12:02 GMT, Thursday, 5 March 2009
What low interest rates mean for you



By Kevin Peachey
Personal finance reporter, BBC News

Monopoly piece on cash
Some trackers run at a margin below the Bank rate

Very low interest rates raise the intriguing theory that some lenders could have to pay interest to mortgage customers.

Some deals were being offered in the summer of 2007 that tracked at a percentage below the Bank of England's official Bank rate.

For example, 1,500 Cheltenham and Gloucester customers have a mortgage which has interest set at 1.01% below the Bank rate.

This means their interest rate has now turned negative, opening up the possibility that the lender should be paying the borrower.

But C&G, which is owned by the Lloyds Banking Group, said that its contracts made it clear that interest was payable only by the borrower and not the lender.

As a result, those customers with such a policy have seen rates stop at 0%. In other words, they currently pay no interest on the home loan.

Terms and conditions

The latest reduction in the Bank rate - taking it to just 0.5% - has pulled more people into this situation.

If the specified interest rate drops beneath zero, we believe that the borrower's obligation to pay drops to zero, but not below
FSA statement

A number of deals offered last summer by Birmingham Midshires and the Halifax track at more than 0.5% below the Bank rate.

All these lenders are now part of the Lloyds Banking Group and so will also see interest fall to 0%.

This policy seemed to be backed up by a statement by the regulator, the Financial Services Authority (FSA), which had analysed some of these offers.

"Every mortgage contract has to be considered in the light of its specific terms and conditions. But the FSA has analysed several contracts and has concluded, in general, that paying interest is a one-way obligation on the borrower," a FSA spokesman said.

"Simply because a contractual rate of interest on a tracker product drops beneath zero does not mean that the lender is bound to pay the borrower the "negative" balance on a monthly basis or otherwise account for it to the borrower.

"If the specified interest rate drops beneath zero, we believe that the borrower's obligation to pay drops to zero, but not below."

However Ray Boulger, of mortgage broker John Charcol, argued that the FSA was offering mixed messages.

He said that this view was not specifically addressed in the key facts section of a mortgage contract.

This opened the potential for some people to go to the Financial Ombudsman for a decision on whether the decision by Lloyds Banking Group not to pay interest to borrowers was fair or not.

Going to the ombudsman is free for consumers, although the savings made if a decision went in their favour would be small unless they had a very large mortgage.

Different deals

These deals tracking below the Bank rate were sold as loss leaders at a time when lenders were trying to attract new customers.

In general, by definition, fixed-rate mortgages do not change when the Bank rate changes.

People whose home loans are tracker deals see their repayments move in line with the Bank of England's Bank rate.

However, some lenders have set a collar or floor on tracker deals that meant interest rates would not fall below a certain point even if the Bank rate falls.

These include Nationwide (collar at 2%), Norwich and Peterborough (3%) and Skipton (3%) building societies.

Borrowers on the standard variable rate (SVR) might see interest rates fall, but it is at the discretion of the lender.

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