The days of cheap loans are long gone
Borrowers are still paying the price for lenders' mistakes
Saturday 29 August 2009
Are banks, building societies and other lenders ripping people off by charging over the odds for loans and mortgages? Figures out this week suggest they're doing just that with margins – the difference between the cost of a loan and the charge the lender makes – at all-time highs.
Unsecured personal loan rates have soared by 40 per cent over the past five years, climbing from an average 8.71 per cent to 12.27 per cent, according to Moneynet.co.uk. "With the base rate now a mere 0.5 per cent compared with 4.75 per cent five years ago, lenders' margins have shot up from 3.96 per cent to a staggering 11.77 per cent," says Andrew Hagger of Moneynet.
The average two-year fixed-rate mortgage is now charged at 5.18 per cent, according to Moneyfacts. Compared to the two-year swap rate of 2.04 per cent, that gives lenders a margin of 3.14 per cent – the widest ever on record, according to Michelle Slade, personal finance analyst at Moneyfacts.co.uk.
"Borrowers looking for a new mortgage deal are continuing to pay a heavy price for previous mistakes made by lenders," she says. "Margins continue to be increased as lenders look to repair dented balance sheets. Normal rules, where lenders pass or decrease rates based on the cost of funding, seem to have well and truly gone out of the window."
Underpinning this comment is the fact that the bank base rate has remained low at 0.5 per cent for months. So how is it that the cost of borrowing is increasing?
Pierre Williams, head of research at MoneyExpert.com, says: "Base rate isn't a factor in the pricing of loans today. There's little prospect of rates improving until the outlook for employment stabilises and the banks repair their balance sheets.
"Borrowers must accept they will pay a heavy premium in comparison with the 0.5 per cent base rate on any loan they take out. The days of cheap loans are long gone. Rates are sky high with many of the banks building in a very healthy margin to insure against defaults, which remain a real possibility with unemployment creeping ever higher. There's also some suggestion that some lenders are deliberately looking to price themselves out of the market. Basically they don't want to lend because they believe it is too risky."
Annie Shaw of consumer personal finance website CashQuestions.com says the perceived higher cost of borrowing is a sign of the times. "The fact that lenders are not reducing the cost of fixed-rate mortgages, despite a 30 basis point reduction in the cost of funding on the swap rates market, is totally unsurprising.
"While it is disappointing for buyers who can't find finance, it is absolutely right that lenders should repair their balance sheets and take a – belatedly – cautious attitude to lending and charge more for it," says Shaw.
"Lenders can't operate at the unsustainable margins we saw a few years ago, when they are incurring significant bad debt write-offs, and being required by the Government to hold unreasonably large levels of liquidity on which they earn virtually no return." She says that borrowers looking for fairness in the current market will have to think again. "Fixed-rate mortgage charges are not going to become 'fair' until the base rate goes up and those on any sort of tracker product start paying rates that reflect the cost to the lender."
In other words, the loan market has changed. That is now reflected in the fact that there are fewer lenders and thus less competition.
In the mortgage market the number of major lenders has been slashed, with Lloyds now controlling Halifax, and Santander owning the Abbey, Alliance & Leicester and Bradford & Bingley brands. The number of lenders in the unsecured loan market has also shrunk – in fact it has more than halved from 62 back in 2004 to just 29 today.
Allied to that is the fact that lenders are less keen to lend. For starters, loans, in particular, have become much less profitable since the Office of Fair Trading cracked down on the selling of payment protection insurance. In the past, lenders could afford to discount their loan deals as they were making huge profits from the associated insurance they sold with each loan.
Now the OFT has ruled that PPI cannot be sold in the same way, lenders have been forced to re-introduce more practical pricing to their loans so that the loans themselves become profitable.
"When credit was plentiful, lenders were keen to offer low rates to get high volumes of business, hopefully with the payment protection icing on the cake," says Andrew Hagger. "Now the situation is totally different. Credit is tight, bad debts are rocketing and loan providers are far more cautious but operating on a vastly increased margin.
"There are a few reasons that account for some of this inflated margin: the cash cow that was PPI has gone, lenders are concentrating on rebuilding their balance sheets, bad debts and unemployment are on the up, and volumes are no doubt lower on the back of a much tighter-risk approach."
There has also been a move towards an increased use of personal pricing, he reports. It has been adopted by around a dozen lenders, including some of the bigger names and is generally used for "offline" loan applications, where loan rates are not advertised.
This, in itself, is a retrograde step as anyone applying for a loan doesn't know what rate they will be offered until they apply, which makes it much harder for borrowers to shop around.
Despite that, demand for personal loans is showing real signs of life for the first time since 2008, says Ed Bowsher of website lovemoney.com. "It's because some consumers are struggling to remortgage and are borrowing via other routes as a result. In a climate where it can be hard to remortgage, or get a 0 per cent credit card, a personal loan at around 8 per cent may be the best option for many borrowers."
Tim Moss, head of loans and debt at moneysupermarket.com, warns that some lenders are only offering the best loan rates to their existing customers and, even then, only on higher amounts. People seeking smaller loans, of £5,000 or less, have always been charged more, but that differential has recently soared. Those looking for these types of small loans – under £5,000 – are being stung the hardest, says Moss. Those looking for a loan of £10,000 can expect to pay nearly 2 per cent less, while in August 2005, the difference between a £10,000 and £5,000 loan was only 0.15 per cent.
"Banks and building societies are more cautious about who they'll lend to than in pre-credit crunch days, which has made it much harder for consumers to get loans," Moss points out. "Some lenders are introducing market-leading deals, but these are restricted to customers who have an existing relationship. The clampdown on the sale of payment protection insurance has caused providers to hike up prices to recoup lost revenue. As a result it has become increasingly difficult to get a competitively-priced loan."
He suggests that borrowers look around for better deals. "However it's important to only apply for products you're likely to be accepted for, otherwise you could damage your credit record," warns Moss. "With lending criteria becoming more and more stringent, it's important to keep your credit record as clean as possible and not taint it with failed applications for loans."
Olivier Beau de Lomenie, managing director of thelendingwizard.com says borrowers shouldn't apply for the first loan offer they find. "There are still good loan deals available for savvy borrowers and by safeguarding your credit score and researching the market there is competitively priced credit available if you look in the right places.
"Many are only available to existing bank customers so it certainly makes sense to try your own bank. Loan comparison sites are also good places to find deals. Our lowest rate loan is Your Personal Loan at 8 per cent which, for loans up to £5,000, is by far the lowest in the market.
"The AA Personal Finance loan 8.55 per cent is also competitive and exclusive to us. More importantly to qualify for either of these loans you do not have to be an existing customer," says Beau de Lomenie.
Bargain Hunter: Getting your hands on these baby goodies is child's play
Time is running out for holiday home tax relief
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
The HiFX guide to managing corporate foreign exchange and international payments
The Cyprus dream becomes a nightmare
- 1 Secret Cinema: Why were Back to the Future screenings cancelled?
- 2 Christians: The world's most persecuted people
- 3 Israel-Gaza conflict: The secret report that helps Israelis to hide facts
- 4 Thatcher ‘was warned of Tory child sex party claims’
- 5 The Simpsons Family Guy trailer: First look at crossover episode after Comic-Con debut
Israel-Gaza conflict: The secret report that helps Israelis to hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
Opponents of Israel's military operation in Gaza are the real enemies of Middle Eastern peace
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...
£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...
£30000 - £45000 per annum: Harrington Starr: A Global Financial Service Organi...
£30000 - £40000 per annum + Bonus+Benefits+Package: Harrington Starr: C# Web d...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000