Mortgage lenders' have failed to pass on much of the cut in base rates, with margins between the base rate and lenders' Standard Variable Rates more than doubling over the last year.
Base rate slashed - mortgage rate trimmed
Figures supplied to Primelocation.com by the financial information providers Moneyfacts show that the margin between base rate and SVR has jumped in the last 15 months - a period in which base rates have been dramatically cut.
In December 2007, when the base rate was 5.75%, the average SVR was 7.47%. But today, while the base rate is a mere 1%, the average SVR is 4.83%. At a time when the base rate has been slashed by 4.75%, average SVRs have been trimmed by only 2.64%.
To put it more starkly, mortgage lenders have increased the difference between base rate and SVR from 1.72% to 3.83% - more than doubling the margin.
Hard hit borrowers
Michelle Slade, analyst at Moneyfacts, says: "Those already on or about to move on to their lender's standard variable rate have been hardest hit of late, seeing just a third of the latest two cuts passed on. Many lenders seem to be actively trying to discourage borrowers using SVR as a product option, maintaining their SVR in line with average mortgage rates.
"Just one in four lenders has announced a cut in SVR this month and many of these passed on no cut last month."
Slade warns that it is not only borrowers on SVRs that have lost out. Lenders have also increased margins on new tracker mortgage rates. And interest charged on fixed rate mortgages is, on average, more than twice that paid by lenders for their wholesale finance - the inter-bank lending rate.
Not happy to lend
"Lenders will only pass on cuts to a level they are happy to lend at, and for most this seems to have been reached," warns Slade. "Anyone coming to the end of an existing mortgage deal in the coming months without substantial equity in their property will find it very hard to find a competitive new deal. Rates are still falling, but at a much slower level than borrowers would have hoped."
But, in fairness, it needs to be stressed that the margin between base rate and lending rate is not the same thing as a lender's profit margin. Inter-bank lending rates are currently much higher than base rates, while building societies argue they must attract savers with reasonable rates of interest if they are to have the supply of money to finance existing and new mortgages.
Attracting savers
Neil Johnson, a spokesman for the Building Societies Association, defends his members' actions in not passing on the benefits of the base rate cuts. "The issue in particular for building societies is that they fund the majority of their lending through their savers," says Johnson. "Building societies have to balance the interests of borrowers and savers when setting rates. So for customers not on tracker mortgages, they often can't pass on base rate reductions because they have to protect good rates for savers."
Meanwhile, there are complaints that comparing SVRs is a pointless exercise. In many cases, it is alleged, lenders are publicising best rates, while actually only offering much higher rates to borrowers - claiming that individual circumstances prevent borrowers taking advantage of the lowest rates on the market.
Misleading 'best buys'
Michael White, chief executive of financial intermediary Email Mortgages, says: "What we would like to know is, who's buying the 'Best Buy' mortgage? We can guarantee that, for the vast majority of consumers, the products detailed in the 'Best Buys' are wholly irrelevant and they will have little chance of securing these headline grabbing rates because of the products' criteria. In our opinion the 'Best Buys' do more harm than good in that they provide the consumer with unrealistic expectations of the mortgage they will be able to secure."
At a time when banks have never been less popular, both they and building societies are being accused not only of increasing their profits, but also of misleading their customers. It is no way to increase confidence in the financial services sector.
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related links
- Building Societies Association
- Moneyfacts.co.uk
To put it starkly, mortgage lenders have increased the difference between base rate and SVR from 1.72% to 3.83% - more than doubling the margin.
