Mortgage holders are paying over £1,000 a year more than they should be, according to new analysis that accuses lenders of failing to pass on interest rate cuts.

Research by the House of Commons Library, commissioned by the Liberal Democrats, has found that mortgage rates have fallen at a significantly slower pace than the Bank of England base rate over the past year. While the base rate has dropped by 19% since July 2024, from 5.25% to 4.25%, average mortgage rates have declined by just 13% for two-year fixes and a mere 4% for five-year fixed deals.

The discrepancy means that while borrowers taking out new mortgages have seen some relief in monthly payments, the reduction falls well short of what might be expected if lenders had followed the base rate trajectory more closely. For a typical two-year fixed mortgage, the average monthly payment has dropped by £90 to £1,189, while five-year fixes have seen just a £26 monthly reduction to £1,178.

If mortgage rates had fallen in line with the base rate, homeowners could be saving an additional £41 per month on two-year products and £87 per month on five-year deals. That equates to an annual saving of £492 and £1,044 respectively.

CALL FOR INTERVENTION

The Liberal Democrats said the figures were evidence that banks are exploiting homeowners in the midst of a cost of living crisis. The party’s treasury spokesperson, Daisy Cooper MP, said lenders were treating borrowers as a “cash cow”, and urged the Chancellor to intervene.

“Mortgage lenders have used homeowners as a cash cow in the midst of a cost of living crisis,” she said. “By failing to cut mortgage rates in line with interest rates they are leaving millions of families out of pocket and worried about how they will keep a roof over their head.”

With the Bank of England announcing further cut in interest rates on Thursday, pressure is mounting on the Government to take action. The Liberal Democrats are calling for ministers to summon bank executives to account for their mortgage pricing, and for a reversal of cuts to the bank surcharge — a move they say could raise £4 billion a year.

The party also linked the issue to broader economic policy, calling on the Government to secure a better trade deal with the European Union to improve long-term economic prospects and ease pressure on household finances.

Last month, the Liberal Democrats also proposed halving energy bills over the next decade, arguing that the Government must be “far more ambitious” in tackling the cost of living.

Cooper accused both the Conservatives and Labour of failing to address the crisis. “The Chancellor needs to get a grip, call in lenders to explain to them that many homeowners are already on the brink and struggling to keep the roof over their heads,” she said.

“Reeves also needs to reverse the Conservatives’ tax cuts for the big banks as they rake in billions in profit with these sky high mortgage rates.

“Labour has been far too timid and wrong-footed in tackling the cost of living crisis. Their ‘jobs tax’ is hurting pay packets, mortgage rates are crippling homeowners, and spiralling energy bills leave people wondering how they will put food on the table.”