Banks’ tracker profits soaring

Published 01st Nov 2009

Base rate is still rock bottom, but lenders are raking in the cash by continuing to charge rates well above it


Lenders stand accused of cashing in on the zeal for tracker mortgages as brokers report ever-increasing interest in variable loans from borrowers.

According to figures from the Bank of England published last week, the price of Bank-rate trackers above three month Libor — which reflects the cost of wholesale funding for tracker loans paid for by some lenders — last month rose to a high for 2009.

The figures suggest lenders are making £1,880 more a year on a £200,000 mortgage compared with January, which was arguably the height of the mortgage freeze and when wholesale funds were vastly more expensive.

Ray Boulger, technical director at John Charcol, the mortgage broker, said last week that nearly two thirds of clients opted for variable rate mortgages in September. This included trackers that rise and fall in line with Bank rate, currently 0.5%, as well as discounted deals, which are pegged to lenders’ standard variable rate.

Bank of England figures, meanwhile, show the average tracker for borrowers with a 25% deposit rose for the fourth month in a row to 3.9% in September.

With Libor at a record low of just 0.58%, this represents a spread of 3.32% — 0.95 points higher than in January. The figures show the average tracker in January was 4.51% while Libor was 2.13%.

Melanie Bien, of Savills Private Finance, the broker, said: “Lenders have arguably added millions of pounds a year to the cost of mortgages over Libor since January — just as borrowers are taking them up in higher and higher numbers. This is opportunistic to say the least.”

In a research note last week titled “Mortgage lending spreads — why are they so wide?”, consultancy Capital Economics said lenders were trying to discourage borrowers.

“Mortgage lending spreads, already at unprecedented levels, widened further [in September]. We suspect that, while they partly reflect higher costs of other types of mortgage funding, the high level of spreads is also a result of lenders trying to ration credit.

“We suspect that some of the widening reflects higher profit margins. The 1.4 percentage point fall in Libor rates since March must have reduced average wholesale funding costs to some extent.”

Most economists expect rates to rise in the middle of next year. However, Boulger is advising clients that they will remain low “well into 2011”.

He said: “The economic figures for the UK out earlier this month support this view. Consequently we have continued to advise the majority of our clients to take a variable rate mortgage.”

Last week, HSBC pulled its market-leading two-year discount loan at 1.99%.

Woolwich still offers a deal at 1.98% for one year, which then reverts to a tracker at 2.49 points over Bank rate, though borrowers are warned they are tied in for the first three years, with a 2% early repayment penalty should they wish to switch.

Boulger said that fixed-rate deals were in effect overpriced.

Source: ' Sunday Times '

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