Banks profit from bigger margins on mortgages

Banks have more than doubled the profit margin they make on mortgages over the last 18 months.

In a bid to rebuild their decimated balance sheets, and in the case of the all- or part-State-owned banks, an attempt to return to profit and pay back the taxpayer, UK lenders are now loading some of their mortgages and other loans with bigger margins then ever before.

While the Bank Base Rate has now remained at an historic low of 0.5% for 14 months, the rates charged on certain mortgages, particularly at higher loan-to values, are not that much cheaper than those available when Bank Base Rate was 5%.

At the same time, the rates of interest offered on savings accounts are at an all-time low.

Research carried out by financial analyst Citigroup Global Markets reveals that the margin lenders charge on mortgages has soared from 0% to 1% at the end of 2008 to 3% today.

The analyst suggests that a lack of competition in the mortgage marketplace could be to blame. While prior to the credit crunch, there were well over 100 mortgage lenders operating in the UK, that number has now reduced dramatically, and the smaller players are doing less and less business as a proportion of the market.

The top six lenders (Lloyds, Santander, Barclays, HSBC, RBS and Nationwide) now account for more than 80% of all mortgage lending, compared with 55% in 2006.

Citigroup said:

"UK banks have regained significant pricing power. In our view, this will continue to drive up margins."

David Hollingworth of London & Country said:

“The mortgage market has undergone a complete about-face over the past few years.

“Mortgage availability is still severely limited, and as lenders repair their balance sheet, it is borrowers that lose out due to the higher margins on mortgage rates.”

A spokesman for the British Bankers' Association said:

“For most people, mortgages from banks are cheaper than they have been for some time: the vast majority on base rate trackers and standard variable rates (SVRs) have seen their monthly payments in the past two years.

“But rates can no longer track Bank of England base rate as closely as they did in the era before the credit crunch. Now required to finance more lending from deposits, and the wholesale market, so the market rate - reflected by less of a factor in mortgage than the rates banks pay

“In short, money is harder to come by for banks as well as for customers, and they can no longer offer the unsustainable rates of that easy credit era.”