Halifax ordered to allow tracker loans to drop below 3%

Better off: homeowners should get the full benefit of any interest rate cut

More than half a million homeowners with Halifax tracker mortgages should get the full benefit of any interest rate cut this week despite small print that gives the bank the right not to pass it on, a City watchdog ruled today.

The Financial Services Authority said the Halifax would not be able to enforce the so-called "collar" on its tracker mortgages.

This gives the bank the option to stop passing on interest rate cuts to its tracker customers once base rates fell below three per cent.

The Bank of England is tomorrow expected to order at least a half-point cut and probably a full point reduction in its base rate, currently standing at three per cent.

But Jon Pain, the FSA's retail market manager, said that the collar could be unenforceable because it had not been included in the lender's "key facts illustration" - the mortgage documents given to every borrower. Halifax removed the details of its collar from its key facts in 2005.

Mr Pain told the Council of Mortgage Lenders, the industry body representing the banks and building societies that make home loans: "If it is not (included) you run the real risk of both breaching our disclosure requirements and having an unfair contract term you cannot enforce."

A borrower with an interest-only £200,000 tracker mortgage at one percentage point above the base rate could save more than £80 a month if rates fall by half a point, while a full point cut would cut £160 off their monthly mortgage bills.

Halifax, Britain's biggest mortgage lender, said it was considering its position.

"We will make the decision on whether or not to exercise the option when rates do fall below three per cent," a spokesman said. "We are noting the comments by the FSA and are looking into them."

Many industry experts also believe that Halifax, part of the state-controlled HBOS banking group, wants to avoid the bad publicity that would be generated if it did try to invoke the collar.

Details of the collar were removed from the Halifax key facts because of FSA concerns about the complexity of the Halifax's mortgage documentation. The regulator was worried that the 11-page key facts statement was too unwieldy and asked for it to be trimmed.

The collar detail was one of the items removed and relegated into the smaller print of the larger mortgage document.

A spokesman for the FSA defended the request to simplify the documentation, adding: "It cannot be right that to shorten your KFI (key facts) you take out something which is required under FSA rules. It is a rule that a collar should be included in a lender's KFI."

Despite the pressure on the Halifax, up to 600,000 other borrowers on tracker mortgages will miss out on most or all of tomorrow's expected rate cut.

Nationwide and a number of smaller lenders have collars that are automatically triggered when base rates reach three per cent or 2.75.

These were included in KFIs and are not open to doubt.

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