Zero Pence A Month Mortgage

In 2007, Cheltenham & Gloucester sold a tracker product which charged Bank Of England rate minus 1.01 percent. So when the interest rates go to 1 percent (which it almost certainly will go to in early 2009), they will be left with a mortgage where the borrowers would need to pay nothing on an interest only mortgage. C&G apparently have a floor of zero percent.

As per an article in the timesonline, because C&G's computer systems cannot cope with zero rates, it would be temporarily charging 0.001 percent (on the BOE minus 1.01% mortgage) if base rate is cut to 1 percent - that would translate to about 8.33 pence a month on a 100K interest only mortgage. This overcharge , would of course , be refunded back to the borrowers later !!!

Some lenders have a collar on their mortgage products which will set a floor on the rates - i.e the rates will not fall below a certain level even if the BOE rate goes all the way to zero. For those mortgages that do not have such a collar on a base rate minus tracker , it will be interesting to see if lenders will be obliged to pay money to the borrowers when the base rate goes to zero !

Jay