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.Reuse content