The great home lending rip-off: Families pay £1,800 a year too much on mortgage

Published 28th Jul 2009

Homeowners are paying an average £1,800 a year extra for their mortgages as banks fail to pass on cuts in borrowing rates.

All the big lenders, including those saved from ruin by the taxpayer, are ramping up loan rates at the expense of families and businesses, a Daily Mail analysis has found.

Bank base rate has plunged to a historic low of 0.5 per cent, but business organisations say their members are going to the wall because they cannot gain access to credit, while home-buyers are struggling to find mortgages and then having to pay over the odds.Against this backdrop, Chancellor Alistair Darling yesterday hauled bank chiefs into Downing Street and threatened them with an investigation into price-fixing.

The banks have defended their high lending rates by claiming that they have to recoup the cost of borrowing money.

But the Mail has found that there is a soaring gap between what they are charging borrowers and what the money actually costs them.

Back in July 2008, banks typically added 0.5 per cent to the average mortgage on top of their borrowing costs. But today, they are adding an extra 2.61 per cent.

This means that a typical homeowner with a £150,000 repayment mortgage is paying an extra £1,788 a year. Those with bigger loans are obviously being clobbered even more.

Banks borrow their money through a mechanism known as Libor - the inter-bank exchange rate - which is traditionally higher than Bank of England base rate.

However, the Libor rate has also plummeted from nearly 6.5 per cent in October last year to just under one per cent today.

Although mortgage rates have fallen to reflect this, they would have dropped much further if banks had passed on the full rate cuts.

The Daily Mail figures show that banks have actually increased their margins - the difference between what they charge borrowers and what money actually costs them - by up to five per cent.

The difference between the cost to the banks of borrowing money and the amount they charge for loans is the largest since the site began keeping records in 1988.

Mr Darling last night threatened to refer banks to the Competition Commission over their failure to pass on cuts to borrowers following 'robust' talks in Downing Street.

Senior Treasury sources said that the Chancellor and Business Secretary Lord Mandelson were 'not convinced' by the explanations they were given. Mr Darling said: 'I am concerned to make sure that banks do not charge any more than is absolutely necessary.'

The heads of banks including HSBC, Barclays, Lloyds and Royal Bank of Scotland will now be hauled in front of City Minister Lord Myners to explain themselves in one-on-one meetings over the summer.

However, Treasury sources admitted that they did not have evidence that banks had breached competition rules and the Government could not force banks to increase lending.

Analysts say institutions which were propped up by massive taxpayer support are among the worst offenders.

Nationalised Northern Rock, for example, has increased the interest on its five-year fixed-rate loans by 0.6 per cent to 6.29 per cent.

A typical two-year mortgage deal now costs 5.17 per cent, up from 4.65 per cent three months ago.

There are also concerns that small and medium businesses are failing to gain access to the £1.3billion Enterprise Finance Guarantee scheme aimed at giving credit to cash-strapped firms.

For their part, bank chiefs claimed they were meeting their obligations to businesses.

They insisted that lending to small firms rose by £391million in June, compared with May's £133million increase.

Source: ' Daily Mail '

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