The 8p-a-month mortgage is set to become a reality for thousands of borrowers next week because of over-generous loan terms offered by banks and building societies in the benign era just before the credit crunch hit.

Thousands of borrowers on tracker deals struck in the early summer of 2007 will pay almost no interest and could even be in a position to demand payment from their banks on a strict interpretation of the fine print.

Their effective mortgage rate is set to fall close to or even below zero if, as expected, the Bank of England cuts base rate from 1.5 per cent to an unprecedented low of 1 per cent next Thursday.

The biggest beneficiaries will be thousands of Cheltenham & Gloucester borrowers who took out a tracker product in July 2007 which charges base rate minus 1.01 per cent. Lloyds Banking Group, now 43 per cent owned by the taxpayer and also the owner of C&G, said that there was a zero floor to the deal and that because its computer systems could not cope with zero, it would be temporarily charging 0.001 per cent if base rate is cut to 1per cent.

For borrowers on a £100,000 interest-only mortgage that would translate into a monthly interest payment of 8p. Those on repayment mortgages will continue to pay more as principal repayments are included in their monthly bills.

Borrowers would later be refunded the 0.001 per cent overcharge, Lloyds said.

Other banks facing the prospect of lending for almost nothing include state-owned Bradford & Bingley, which offered tracker mortgages at base rate less 0.75 per cent and HSBC and Halifax, also part of Lloyds, which priced tracker deals at base rate less 0.51 per cent.

Some lenders, but not all of them, put in place safeguards known as “collars” to prevent the effective interest rate turning negative, which in theory could oblige them to pay interest to the borrower.

One lending chief told The Times that he and many other institutions had been taking legal advice to establish the position if base rate was cut further. They are confident that the courts would support them in ruling that it was not reasonable to expect a lender to pay interest to a borrower.

Some lenders have slipped up by failing to alert borrowers to any floor in the rate in the Key Facts Illustration, a legal document that accompanies every mortgage offer. The Financial Services Authority established the precedent that floors had to be in the KFI when it told HBOS it could not enforce a floor set out in its fine print.

The Council of Mortgage Lenders (CML) has called on the Government to impose an industry-wide collar on existing base-rate tracker mortgages held by more than three million homeowners. It argues that a collar preventing tracker mortgage rates from falling to 0 per cent “made logical sense” because historically low interest rates were hampering the banks as they try to attract new savings deposits.

Only 300,000 homeowners have mortgages that already have enforceable collars written into the small print. An industry-wide collar would prevent a further 3.6million homeowners on tracker deals from benefiting from future cuts in the Bank of England base rate.

Michael Coogan, of the CML, said: “This is a unique and innovative solution to a unique situation. Low interest rates are a good deal for borrowers in the short term, but it is damaging the ability of lenders to fund new mortgages.”

Interest rates, which have already fallen to a 315-year low of 1.5 per cent are widely expected to be cut further to 1 per cent next week.

Economists also forecast that interest rates could fall to as low as 0.25 per cent or 0 per cent before April as the Bank of England's rate setting committee battles to try to boost the economy in the face of a deep and prolonged recession.

Halifax, Britain's biggest mortgage lender, Bank of Scotland, Birmingham Midshires and Intelligent Finance all withdrew base-rate tracker deals last night. All four brands have also scrapped self-certification loans and restricted the availability of buy-to-let deals and home loans for new build properties.