50,000 have interest-free mortgages

The latest Bank of England base rate cut has left tens of thousands of homeowners with interest-free mortgages.

More than 50,000 people are thought to have taken out a tracker mortgage over the past two years that was guaranteed to be at least 0.5% lower than the base rate.

Cheltenham & Gloucester, which is part of Lloyds TSB, is thought to have offered the lowest deal with a tracker rate of 1.01% below the base rate. For 1,500 customers this means they have not paid any interest since the cut in February.

The group also had tracker deals that were 0.5% or more below the base rate, while at the end of 2007 Halifax offered a two-year tracker at 0.51% below base rate.

The Co-operative Bank has 500 customers with tracker mortgages at 0.61% below base rate, and a number of buy-to-let lenders, including Mortgage Express, which is now nationalised, offered mortgages with rates that have now dropped to 0%.

With the Bank of England base rate now at a historic low of 0.5%, all of these customers should now find themselves paying no interest on their home loan at all.

Cheltenham & Gloucester is currently charging mortgage customers in this position 0.001% interest while it adjusts its computers to accept a rate of 0%, after which people will be refunded the money they have overpaid, while the Co-operative Bank is flooring the rate it charges customers at 0.001%.

The banks say they have taken legal advice and are confident that they do not have to pay interest to borrowers whose deals now effectively charge negative interest.

The Financial Services Authority has also issued guidance saying that the payment of interest is a one-way contract.

But Ray Boulger, senior technical manager at John Charcol, said he thought people on one of these deals should complain to the Financial Ombudsman Service if their rate had now fallen below 0% and their lender was not paying them money.