Lenders claw back profit on mortgages
Rates on tracker mortgages have jumped despite a 2% fall in the Bank of England base rate since October.
Lower interest rates should benefit borrowers with tracker mortgages, as this sort of home loan tracks the base rate set by the Bank of England. However, despite existing tracker loans becoming cheaper following the interest rate cuts in October and November, new deals have actually got more expensive.
Around the time of November's 1.5% cut, many of the big lenders pulled their tracker deals to be repriced. Experts say they did this to limit the amount of business coming their way.
A number of lenders - including Abbey, Alliance & Leicester, Halifax, Cheltenham & Gloucester and Woolwich - have now reintroduced tracker mortgages complete with higher interest rates, and borrowers still need to have a significant deposit to get a deal.
Lloyds TSB's new two-year tracker stands at 4.79% and includes a £1,995 fee, but this deal is reserved for those with a deposit of at least 40% of the value of their home. The cheapest deal available for borrowers with only a 25% deposit is offered by Cheltenham & Gloucester at 4.79%, but this includes a heftier £2,094 fee.
“The new tracker mortgages on offer simply don’t reflect the cut in interest rates,” says David Hollingworth, a mortgage specialist at London & Country. “In fact, mortgage lenders’ margins are back to where they were before they withdrew from the tracker market.”
He argues that the main reason lenders are shying away from offering attractive tracker deals is that the cost of funding has remained stubbornly high. “Although interest rates have dropped to 3%, the cost of funding for banks has not fallen quite as quickly, so the appetite to offer competitive tracker mortgages has reduced,” Hollingworth explains.
James Caldwell, director at Fairinvestment.co.uk, says lenders are also waiting for their competitors to re-enter the market before tracker products start become cheaper.
“By offering these tracker deals, lenders are attempting to get more of the mortgage market," he adds. "It will be interesting to see what the other big lenders do in response."
However, borrowers looking to fix their mortgage payments will also be disappointed. New research by financial data provider Moneyfacts has found that the average two-year fixed-rate deal stands at 6.13%, some 3.72% above the cost of funding for lenders.
Michelle Slade, an analyst at Moneyfacts, said: "The average rate on fixed-rate mortgages over the past few months has remained almost constant, despite the funding cost to lenders reducing significantly. The rate should be at least one percentage point lower, if not more.”
As such, Hollingworth acknowledges that borrowers unsure of what deal to choose are faced with a dilemma - but he urges them to act fast.
“The danger of sitting on your hands and paying the lender’s standard variable rate is that property prices are falling rapidly," he explains. "It’s impossible to get a 95% and even 90% LTV deal now, and even borrowers with 85% of equity in their homes are finding it tough. By hanging on for just a few months you could be tipped into one of these brackets, so it’s vital you act sooner rather than later.”
According to Hollingworth, Woolwich offers an attractive three-year deal that is fixed at 3.99% for a year and then reverts to 1.99% above the Bank of England base rate.
He says: “This is a nice combination deal because not only is the fixed-rate very competitive, the revert-to rate is too. However, borrowers need to be aware that their payments could increase if interest rates start to rise over the next three years.”
On the plus side, mortgage rates may not get any more expensive - unless the cost of funding for lenders gets dearer.
Ed Stansfield, property economist at Capital Economics, says: "Unless there is another marked deterioration in credit market conditions, we think it is unlikely that mortgage interest rate spreads will widen significantly further. So if base rates fall to 1%, mortgage rates should fall to 3% next year."
But he adds: "Restrictive lending criteria and the recession mean that even such low mortgage rates will not prevent the housing market correction from running its course."
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.