Over the past few months, lenders have been accused of profiteering as the cost of mortgages has increased, despite the Bank of England’s (BoE) official interest rate standing at an all-time low of 0.5% for half a year.
Statistics from Moneyfacts recently showed that banks were charging an average of 3.14 percentage points above the wholesale cost of funding for two-year fixed-rate mortgages. This margin was the widest since moneyfacts’ records began in 1988.
However, the BBA’s factsheet “Your Mortgage and the Markets” argued that it now costs banks more to fund their activities, stressing that the old relationships with the benchmarks no longer apply as a result.
The BBA said that despite rates for many customers hitting an all-time low, the difference between these rates and other economic benchmarks can be wider than they were between 2000 and 2007.
The factsheet noted that savings rates for customers are now 2-3% higher than the BoE base rate, so deposits are a costlier way to finance mortgages.
Angela Knight, chief executive of the BBA, commented: “The recession has made it harder for all economic activity to take place. Many other lenders have simply exited these difficult markets, but the UK’s high street banks continue to offer attractive rates on mortgages, as they do on savings, as competitively as they possibly can.”
The Council of Mortgage Lenders (CML) has already weighed in with its views on the subject, which has been hotly debated since the summer. In July, the CML defended the pricing strategies of lenders in similar fashion.
A spokesperson for the body said: “We wrote about this in July and stand by what we said then. The problem is that people still mistakenly think that official rates such as Bank rate and Libor are a proxy for lenders borrowing costs. The reality is more complex
than that, and the costs are higher than Libor and BBR rates would have you believe.”
Ray Boulger, senior technical manager at John Charcol, said that by and large the BBA has made some “valid points” which would help improve understanding of how lenders priced their products.
He added: “However, their message would have been stronger if they had not used so much spin, as it detracts from their argument somewhat.”
