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How are mortgage holders and savings customers going to be affected by the dramatic changes in the Bank of England Base Rate? Mr K Allen - 06/12/08, Mr P Shorland 11/12/08

Following the 1% drop in Bank of England Base Rate announced on 4th December, we have considered how the Society should respond. There have also been announcements by some lenders that they would remove interest rate minima (sometimes called “collars”) on base rate tracker mortgage products.

Our view is that the rapid falls in interest rates have undoubtedly benefited the Society’s borrowers. The number of our borrowers holding a tracker mortgage is around 17,000 and these customers have seen their rate cut by 2.5% this year. On a £50,000 mortgage, this means that their actual mortgage interest saved over the course of this year to date has been at least £245 (based on the difference between the actual rate that applied on each day of this year and the rate on 1st January 2008), and if rates stay at this level, the saving will increase to £1,250 over 2009.

We have 6,500 borrowers who hold a mortgage linked to our standard variable rate and they have seen their rate go down by 1.99% since January. A customer with a £50,000 mortgage on our standard variable rate will have seen their actual mortgage interest reduce over the course of this year to date by at least £205, and the saving will potentially rise to £995 over 2009.

The Society’s lending over recent years has been careful to ensure that our borrowers have not over-extended themselves: the number of our borrowers who are in serious arrears is 212, which is proportionally less than 30% of the banks’ typical level of arrears. We also have a good record in helping those borrowers in arrears to stabilise their affairs: where we have to proceed to re-possessing their homes, we typically only do so after 9 months and the number of borrowers that reach that position is very small – in fact 31 through 2008 to-date.

On the other hand, the Society has a proportionally larger number of savers than our peers because of our extensive branch network – some 402,000 – and we are very conscious that their incomes have been reduced each time the rates have fallen. A savings member with £50,000 in our 50 Plus Savings Account for the over 50s, will have seen their gross annual interest earnings fall over the course of this year to date by £250 (based on the difference between the actual rate paid on each day of this year and the rate on 1st January 2008), and if rates stay at this level, their loss of income will increase to £1,250 over 2009.

The Society will shortly be publishing on its website up-to-date ratings of our balance sheet and earnings by Moody’s and Fitch rating agencies which confirm the Society’s good lending record, strong capital position and recent satisfactory profitability in 2008. We are therefore able to consider these issues from a position of relative strength.

In making the decision about how we respond to the Bank of England’s Base Rate change, we have to find a balance in circumstances that are very difficult for everyone. Our view is that we need to use the fruits of our careful lending and strong capital position to protect the earnings of our savings members, many of whom are in retirement and therefore have largely fixed incomes. We should do this even if it means reducing the Society’s profits in 2009 from the level seen in 2008. We also feel that our fewer borrowing members have had good benefits to-date and that we should pause before passing on any further reductions in base rates to them beyond those which we are contractually bound to do.

Accordingly, we do not propose to reduce our SVR from its present level of 5.5% or to remove the 3% minimum rate on our base rate tracker mortgages. We will, however, shelter the competitive position of our 50 Plus Savings Account by reducing the rate by only 0.6% to 2.5% - in other words paying 0.5% above the Bank of England’s Base Rate. We will also limit the fall on our Family Easy Access account to 2% and on our Family Young Saver account to 2.75%.

All rate changes will be effective from 23rd December.

For savers who wish to invest their funds for longer terms, we have recently launched a fresh set of 6, 9 and 12 month savings bonds, all priced at 3.65% AER.

This is a difficult judgement to make, but we do feel that enough emphasis has been placed on the issue of distressed borrowers - of whom we have relatively few – and that attention now needs to be paid to the plight of savers - of which we have a great many - even if it means reducing the Society’s strong profit position and using our capital strength to achieve this. These are, after all, some of the reasons why we have mutuals and not just banks.
Why do I have to wait up to 30 days before you reduce the rate I pay on my tracker mortgage? It should be reduced on the day that base rate is altered. Thats why its called a tracker mortgage. sold to me at x% over base. N Moore - 13/11/08

Thank you for your email.

30 days is the maximum set out in the contract between us. We will reduce your tracker mortgage rate within that time, but we are trying to establish what our new cost of funds are, following the Bank of England's surprise move, so that we can move all our rates - savings and mortgages - on the same date.

If we cannot clearly achieve this within the time limit, then we let you know your rate anyway.

Yours sincerely,

Matthew Bullock

Reply from N Moore: Thanks, but i dont think that its fair that i am currently being charged 2.19% above base when i signed up to 0.69% over base. Interest is charged on a daily basis, so if you can calculate it on day by day basis whats stopping you amending the rate on the day the base rate changes?

Out of interest, how long did you take to amend the rate i was charged for the last 3 times that base rate was increased? If it was less than 28 days ie the delay on the last redcution you are applying double standards.

I look forward to hearing from you.

Reply from Matthew Bullock: Thank you for your further response. As I said earlier, we do need to work out what our new cost of funds are before we change our rates.

The announcement by the Bank of England and the Chancellor that they wish rates to be reduced to 3% is not wholly persuasive to savers in East Anglia and the wider capital markets who at the moment are not prepared to deposit their money out at figures starting with less than 4%.

We therefore need to be clear about what the new rates are settling at before we fix our own. Given the size of the move by the Bank of England it is taking longer than usual for this to become clear. We expect to announce our new rates early next week.

For the last three Base Rate increases, the relevant dates were as follows:

Date of Base Rate change Date of N&P change 5th July 2007 (from 5.50% to 5.75%) 10th July 2007 10th May 2007 (from 5.25% to 5.50%) 15th May 2007 11th Jan 2007 (from 5.00% to 5.25%) 16th Jan 2007

Under normal market conditions we have always endeavoured to revise our tracker rates 5 days after a Base Rate change as you will note from the information above. This has been the case regardless of whether the change in Base Rate has been up or down. However, financial markets have been extremely turbulent since the start of the year and we have been required to be much more prudent with regard to managing our variable rates, for both mortgages and savings. As a result, we have taken more time in making decisions on our rates over the past few months.

Reply from N Moore: I can see that this is a persuasive argument for delaying the change to the SVR but i am not satisfied with this explanation for the delay in reducing the tracker rate. You will inevitably have to reduce it in any event - thats why its called a tracker rate - you would seem to be delaying it just to enhance your profits.

I estimate that this delay from 5 to 30 days will cost me in excess of £100 in unnecessary and unwarranted interest. This is unfair.

I feel this is a genuine grievance and in view of your local market share i think this story is in the public interest. Do you have anything to add before i refer this to the local newspapers?

Reply from Matthew Bullock: The terms of our mortgage agreement with you state that we have 30 days in which to adjust rates. We will of course meet this contractual obligation. Your comment is therefore around our adjusting our rates earlier than the contractual terms.

Normally, as you will have seen in my last response, we have been able to do this more speedily, but this time we have deliberately taken longer to finalise our views as to what our real costs of funding are. This is critical because we have an overarching responsibility to all members to make sure that the Society's financing is sustainable. In such turbulent markets and after such an exceptional rate change, where markets have not followed fully the official rate setting, this has been more than usually difficult and important.

This is also important because when we set borrowing rates, we also set savings rates. We have to consider how far we can and should lower the rates to our many savers - in fact. we have and need 7 times as many savers as we have borrowers - and we are conscious that the downward movement of rates is very painful for them.

So, we have rightly in my view, taken longer this time to weigh up how we are going to adjust rates, confident that tracker borrowers know that they at least will be benefiting fully from the Bank of England's move. In fact I can also tell you that we have now reached our view and that we will be adjusting our rates with effect from 27th November, one week earlier than we need to do under the contract that we have with you and other tracker borrowers.

If you wish to lay this correspondence before the local press, I have no objections, since it is already open to public view on the Society's own website.

Historically the N&P has grown by acquisition. Recently there has been building society consolidation elsewhere. Is N&P seeking opportunities to hit the takeover trail? Or do you feel that we are about the right size? Mr J Wright - 08/11/08

Thank for your enquiry as to whether we are likely to grow by acquisition. You obviously have a long memory.

Consolidation in the building society sector is difficult to initiate as a Society, but where we have seen opportunities that we think might be attractive, we have certainly indicated this. In the meantime, we are just in the final stages of completing our 28th acquisition of mortgage brokers in East Anglia, making us one of the largest personal line brokers now in the region. In general, our results make us feel that we have the capacity for more but, as some of the banks have discovered, hasty acquisitions can sometimes be your undoing.

Many thanks for your feedback.

I am a new customer this year with an offset mortgage, associated current and savings accounts. I was disappointed to discover that the mortgage statement is not available online. Are you considering adding this information? S Heath - 06/11/08

I am sorry if we have disappointed you, but we do not yet have a date for putting statements on line. However, we do have a project which is planned for next year to look at all post-sale communications for mortgages and the idea of being able to view your mortgage statement on line is certainly part of that project.

Many thanks for your feedback which will be passed on to the budget manager.

Will the Norwich and Peterborough be passing on the full 1.5% interest rate drop? Mr D Wooden - 06/11/08

It is a common misconception amongst the public and much of the media that lenders benefit from a cut in Bank Base Rate. The actual cost of lenders’ funding is determined not by Base Rate, but by their own cost of borrowing.

N&P’s cost of borrowing is determined by the rates we need to pay savers to attract retail deposits together with the cost of borrowing from other financial institutions or the money markets. As you may be aware, over the last 12 months, financial institutions have become increasingly cautious about lending to each other which has resulted in the cost of 3 month LIBOR (the rate at which financial institutions lend to each other) increasing relative to Bank Base Rate. This in turn has led to increased competition in the retail savings market and rising savings rates as lenders have sought more funding from this source. The overall effect is an increase to our cost of funding mortgages which is now much higher than the current level of Bank Base Rate. To put this into some kind of context, prior to the onset of the credit crunch, 3 month LIBOR was typically 0.15%-0.20% higher than Bank Base Rate; this differential increased to 1.80% during October.

In managing our rates appropriately we need to consider numerous factors including the issue outlined above. We also need to take into account the rate movements and the timings of the changes of our competitors, which can have a significant influence on our funding costs and the level of savings and mortgages that we attract.

Reply from Mr D Wooden: Thank you for reply to my emailed question, unfortunately this doesn’t answer the question directly but is a very good explanation of how the banks lend to each other and how you operate as a company.

The question asked was really whether you as a building society, would like a lot of other lenders be passing on the bank of England’s interest rate drop and reducing your variable rate by 1.5%.

Reply from Matthew Bullock: Thank you for your response.

Your answer to your specific question is I do not yet know. We are still trying to work out what our cost of funds is and to see where other lenders pitch their rates. As a medium-sized society we will then have to find a balance between these two main factors.

We will probably make our minds up in the next two weeks.