Many banks have pushed up the price of their fixed rate mortgages in recent months despite a fall in swap rates. Since March, the average five-year fixed rate deal increased from 5.64% to 6.22% while a two-year fixed rate deal rose from 4.84% to 5.15%.
Howard Archer, chief UK economist at IHS Global Insight, warned that the increased margins charged by lenders were holding back a sustained recovery.
He explained: “The housing market has improved recently, but lower rates are needed to continue this because it is hard for first-time-buyers to access the market. However, lenders are more concerned with attracting low-risk business and making a profit
from high margins.”
Ray Boulger, senior technical manager at John Charcol, said margins would only reduce after lenders rebuilt their balance sheets and there was more capacity in the market.
He commented: “I cannot see lenders decreasing margins any time soon because they need to repair balance sheets. Lenders also have no incentive to cut rates or increase lending because there is a lack of competition and a need to boost reserves. If rates
were cut massively, lenders would be swamped with business and their service would suffer. They can get all the business they need at current rates.”
Michael Coogan, director general of the Council of Mortgage Lenders (CML), said it was misleading to assume lenders were profiting from the margins between the swap rate and the mortgage rate.
He commented: “Lenders face other pressures when setting rates including the cost of structuring products and the perceived risk of the loan. They also have to take into account the higher costs of their business in a post- credit crunch environment. Lenders want to meet demand but need to price business appropriately.”
Nigel Stockton, head of sales at Lloyds Banking Group, said the increased cost of wholesale funding and retail deposits also needed to be considered when pricing products. He added: “We continually look at our pricing to ensure that deals are competitive and make commercial sense. Lenders are more constrained by lending on fixed-rate products. There is a much wider array of other higher costs facing lenders not least including capital holding requirements.”
