Banks and building societies are raking in £1.1 billion a year from huge profit margins imposed on tracker mortgages — even as they insist they cannot afford to pass on last week’s Bank rate cut.

The Bank of England on Thursday cut its rate by 1 percentage point to 2% — the lowest level since 1951 — providing a boost for about 2.5m households on trackers. A borrower with a £200,000 mortgage will receive a £166 reduction in their monthly interest repayments.

Yet, despite falling rates, two of Britain’s biggest mortgage lenders insisted savers would suffer if the full reduction was passed to borrowers. Halifax, which has a 20% share of the market, pulled its range of trackers on Friday after cutting its standard variable rate by just 0.25% to 4.75%. Nationwide, Britain’s biggest building society, cut its rate by 0.69% to 4%.

However, the consumer group Which? said lenders had no excuse to withhold Bank rate cuts after three-month Libor — the rate paid by lenders on the interbank markets to fund trackers — fell 0.51 points to 3.37% last week.

The average two-year tracker stood at 5.05% last week — or 1.68% above Libor at 3.37%, according to figures from data provider Moneyfacts. With 32,600 trackers sold a month at a value of £5.95 billion, the lenders are boosting margins by about £95m a month — or £1.1 billion a year.

Cheltenham & Gloucester (C&G), Lloyds TSB’s mortgage arm, and Abbey withdrew their trackers last week. Northern Rock is expected to follow suit this week.

We give advice to borrowers and savers:

Take out a tracker — if you can

Economists predict rates could have even further to fall in the next few months to as low as 0% in early 2009. Stewart Robertson at insurer Aviva said rates would “sit somewhere between zero and 1%” by the end of the first quarter. George Buckley of Deutsche Bank predicts another half-point cut in the next three months to 1.5%.

HSBC-owned First Direct has a lifetime tracker at 3.69% with a fee of £399. You can switch without penalty if rates look like they will rise again. However, the deal requires a 20% deposit and brokers have warned of slow processing times at HSBC.

Beware the ‘collar’ clause

In a u-turn last week, Halifax and Nationwide abandoned their so-called collars, which would have deprived anyone on their trackers of cuts to Bank rate beyond 3% and 2.75% respectively. All new trackers with Nationwide come with a 1% collar.

Abandon expensive fixes

Those who took out expensive fixed-rate deals at the height of the mortgage crunch could be better off if they switch — despite the hefty penalties involved.

According to L&C, a broker, a borrower with a £200,000 loan and a 25% deposit who secured a two-year fix with Nationwide this year at 6.75% would be more than £5,000 better off a month switching to the First Direct tracker, even after they pay Nationwide’s 1.5% early-redemption fee and First Direct’s £399 arrangement fee.

Keep an eye on fixed rates

New fixed-rate deals have already dropped slightly and could continue to fall as swap rates — used to price fixed-rate home loans — have fallen. Two-year swaps have fallen to 2.86% from 2.99% a week ago — and this could push fixed rates lower.

Aaron Strutt of Chase de Vere Mortgage Management said C&G’s two-year fix at 3.89% was one of the lowest rates since the start of the credit crunch. However, it could be uncompetitive for those with large home loans, once its hefty fee of 2.5% is taken into account.

Don’t bank on the repossession reprieve

Royal Bank of Scotland and Northern Rock have pledged to give all homeowners who fall behind on mortgage payments six months before initiating repossession proceedings. The government later said people who are made redundant would benefit from a two-year “holiday” from paying some or all of their mortgage interest.

Homeowners with mortgages of £400,000 or less and savings of less than £16,000 will qualify if their household has suffered “a sudden and temporary loss of income”. But the government has conceded it may apply to just 9,000 people.

Watch your savings rates

More than 35% of the savings market already pays interest of 1% or less, said Moneyfacts — and rates on these accounts could fall to nothing if providers pass on the full Bank rate cut.

Savers should fix now. Principality building society pays 5.76% over six months, and Anglo Irish Bank 5.75% over a year.

Social-lending network Zopa offers fixed “savings” rates for people prepared to lend money to others of up to 10% — but this does not come with the protection of the Financial Services Compensation Scheme.

But Lloyds offers credit to students

One lender is still offering thousands of pounds in unsecured loans to university students.

Freddie Camrass, 20, a student at Bath University, was pleasantly surprised when he received a letter from Lloyds TSB inviting him to apply for an unsecured loan of up to £14,000 — with an approval time of just 30 minutes.

The letter states: “Approval on a loan is quick and easy with the money in your account in just a few days.”

His father Roger, from Highgate, north London, pictured right with Freddie, said: “I was surprised to see this letter was sent in the wake of a credit crunch brought on by imprudent lending.”

Andrew Hagger of Moneynet, the comparison site, said: “It’s astonishing that unsuitable offers are being made when home buyers are struggling to get a mortgage.”

Lloyds TSB said: “From time to time we send out marketing mailings. Customers still need to go through a detailed application including an affordability assessment.”