Chancellor gets stern with banks

by Gill Montia

Story link: Chancellor gets stern with banks

The gap between Britain’s politicians and its mortgage lenders appears to be widening.

While the Chancellor of the Exchequer, Alistair Darling, is urging banks and building societies to pass on the recent base rate cut to homeowners, Steven Crawshaw, chairman of the Council of Mortgage Lenders, is warning that mortgage lending could be cut by 50% in 2008, unless the Bank of England steps in with extra cash.

Speaking to the BBC following the G7 meeting in Washington DC, Mr Darling argued that the government has been helping the banks and that “the banks have got to help people as well”.

Last week, the Bank of England reduced the base rate for the third time since December and a number of lenders responded immediately with confirmation that they would pass on the full benefit to their variable rate mortgage customers.

However, not all lenders will pass on the cut and, of course, fixed-rate borrowers will not benefit from the change. A number of lenders actually increased their fixed-rates last week.

While a reduction in the base rate will always receive broad approval, it does not necessarily help mortgage lenders.

The majority fund their lending via the money markets rather than customer deposits and are therefore reliant on Libor (the rate at which banks lend to one another).

So while the base rate was cut to 5% last week, Libor (for three-month sterling) actually rose, to just over 5.9%.