Mark up on fixed-rate mortgages hits new high

Published 26th Aug 2009

Banks and building societies have been increasing the cost of fixed-rate loans despite falls in the cost of funding

Britain’s banks and building societies are refusing to cut the cost of fixed-rate mortgages despite huge falls in the cost of funding such deals.

The cost of the best two-year fixed rate deal rose from 3.97 per cent to 4.07 per cent in the past month, research from financial data firm Moneyfacts shows, while the cost of funds on wholesale markets has fallen.

The cost of the average two-year fix at 5.18 per cent stands at a record high compared to the wholesale cost of funding such deals – known as two-year swap rates - at 2.04 per cent. The difference, at 3.14 per cent, represents the widest spread on record, Moneyfacts said.

The mortgage industry has argued that swap rates do not accurately reflect the lenders' costs as some cannot access wholesale rates, usually smaller building societies that instead rely on savers’ deposits to fund lending.

It is widely accepted, however, that most mainstream high street lenders are able to borrow on wholesale markets at quoted swap rates, or for a “tiny” premium.

Michelle Slade, of Moneyfacts, said all lenders are quick to pass on increases in the cost of funding, when they occur.

Slade said: “Margins continue to be increased as lenders look to repair dented balance sheet and borrowers looking for a new mortgage deal are continuing to pay a heavy price for previous mistakes made by lenders.”

Lloyds-owned Cheltenham & Gloucester (G&G) and Nationwide building society have bucked the trend and cut interest rates, however, their deals remain considerably higher than the best-buys.

Chelsea building society and The Post Office - previously offering market-leading deals – were forced to increase rates last week to stem the flow of business.

The market-leading fixed rate deal is currently First Direct’s two-year fix at 3.94 per cent with a £998 fee for a borrower with a 25 per cent deposit. The best five-year deal is from the Co-op at 4.99 per cent with a £995 fee for a borrower with a 25 per cent deposit.

By comparison, C&G charges 4.39 per cent with a £995 fee for a two-year fix for a borrower with a 25 per cent deposit.

Slade said: “Fixed rates are the preferred option for many borrowers', and lenders are cashing in on those seeking a new deal

“Normal rules where lenders decrease rates based on the cost of funding seem to have well and truly gone out of the window.”

Source: ' Times '

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