Answering in this week’s Market Watch are:
Bernard Clarke, spokesperson for the Council of Mortgage Lenders
Martin Wade, director of Your Mortgage Decisions
David Black, insight analyst banking at Defaqto
Bernard Clarke, spokesperson for the CML
An increasing number of commentators are now predicting that there will be no increase in the Bank of England base rate this year. So, lenders will not be surprised if there are persistent, though perhaps sporadic, accusations of failing to “pass on” to borrowers a base rate of 0.5%.
Since base rate dropped to its current level more than two years ago, the CML – and many others in the industry – have been seeking to explain the cost of mortgage funding; the differences between retail banks and building societies and non deposit-taking institutions; and the impact of a shortage of funding and increased competition for retail deposits.
In addition, there are the consequences of regulatory reform and new capital requirements; the pressures on firms to balance new and back book lending, to cover higher costs on smaller business volumes and, yes, to price risk more realistically and rebuild margins.
Collectively, we have made good progress is explaining the complexities of mortgage funding to a sometimes hostile media and unsympathetic public.
But failing to “pass on” base rate remains, superficially, an easy charge to level. And, despite its repetitiveness, it continues to help journalists produce copy on quiet news days.
Slowly, things are improving.
Confidence is returning to securitisation markets, more lenders are offering more mortgage products and Moneyfacts recently reported that average fixed rates are now at their lowest since 1988.
However, we are in for the long haul and will need to explain to consumers and journalists that lenders will now remain risk-averse and continue to price mortgages more realistically.
Martin Wade, director of Your Mortgage Decisions
It’s a well worn phrase, but true, that there is no such thing as a free lunch.
Although the Bank of England base rate remains at a historically low level, we must all remember that we have left the era of pile it high, sell it cheap home loans.
That didn’t work and we’re all currently paying for those mistakes through cuts in public services, mothballed infrastructure projects and higher taxes.
Banks are enjoying good margins on all products from mortgages through to credit cards. We all want banks to be proactive in lending and we have to accept that in order to facilitate this there is a cost.
I for one, not that I am fortunate enough to have such a luxury, would not be willing to loan my hard-earned money by way of a mortgage at a return of just 5% and that’s before you factor in inflation.
Current mortgage rates reflect the economic environment, but I am sure that these margins would not be sustainable if the Bank of England base rate stood at 6%.
Mortgages remain affordable to the employed. As ever, it is typically unsecured borrowing which brings the house down.
With that in mind, we can ask the valid question as to whether credit card APRs currently reflect such good value at 30%?
As mortgage professionals, it is our responsibility to help our clients understand the current environment and advise them accordingly.
As confidence returns and the economy recovers, we will see the base rate increase. This will be somewhat offset by a reduction in margins, but overall I believe we will all be paying more and looking back at how affordable mortgages are today.
David Black, insight analyst banking at Defaqto
While the wholesale market is beginning to resurface in places, the majority of lenders still have to concentrate on raising funds through the retail market.
This forces them into something of a balancing act between the competing demands of borrowers and savers, who want low and high rates respectively.
One of the issues in the mortgage market is that many lenders are doing little in the way of net lending and, for such lenders, the only rate on their back book that they can independently set is their standard variable rate (SVR).
This goes some way in explaining why there is such a wide discrepancy in the SVRs among lenders.
A lot will depend upon the profile of the lender’s back book of existing mortgages. For example, the amount of tracker business that it wrote when margins were wafer thin.
Mortgages at higher LTVs are also subject to higher interest rates, largely because of the significantly higher capital adequacy requirements. These require that considerably more funds be put aside – typically into very low yielding but secure assets – compared to that required for lower LTV lending.
Meanwhile, savers can significantly increase their returns on variable rate accounts by shopping around for the best deals as opposed to suffering the likely lower returns of staying with the same account for years.
In terms of current account overdraft rates, there is a wide variance in the overdraft tariffs which makes comparison a difficult task.
It remains the case that borrowers want low rates, savers want high rates and providers want enough of a margin to earn a profit. Customers need to shop around for the best deal.
