David Prosser: Banks are not to blame for high mortgage costs
Tuesday 15 April 2008
It's hardly surprising Alistair Darling is making great efforts to persuade people the growing crisis in the mortgage market is down to greedy lenders. Labour lists a decade of low interest rates as one of its proudest achievements, so any threat to that record must be headed off quickly. And the banks are an easy target; this, after all, is an industry with a track record of profiteering, not least on unauthorised overdraft charges.
The Chancellor's case is that while the Bank of England has cut base rates three times since the end of last year, mortgage costs are still rising. Those villains at the banks must, therefore, be creaming off ever bigger profits.
But the facts are not so straightforward. Most lenders are passing last week's latest base rate cut on in full to borrowers. Indeed, the only notable exception is Northern Rock, which is now under government control. About half of Britain's 11.8 million mortgage borrowers will benefit from these reductions. Some 20 per cent pay their lender's standard variable rate and will now pay less, as long as they're with a bank passing on lower interest rates. A further 30 per cent are on "tracker" deals, where what they pay moves up and down in line with base rates automatically.
The waters muddy when it comes to the other 50 per cent of borrowers, those who are paying fixed rates on short-term deals. Fixed-rate borrowers are, by definition, unaffected by base rate movements until their deals come to an end. Then they have to remortgage, seeking out the best rates available at the time.
It's here that the banks seem to be up to their old tricks. Most large mortgage lenders have replaced cheaper fixed rates with more expensive products, in some cases raising the cost of this type of borrowing several times.
As a result, anyone coming to the end of a fixed-rate deal will have to make much larger repayments if they want to fix again. First-time buyers are also hit disproportionately hard by rises in the cost of fixed-rate borrowing because they traditionally prefer the security of certainty about the size of their repayments.
But most of the money mortgage lenders put out on fixed rates is borrowed from the wholesale money markets. And here, thanks to the ongoing credit crunch, interest rates have actually risen since the beginning of the year.
Whose fault is it that interest rates on the money markets aren't falling? Lenders say the Bank of England hasn't done enough to unstuck the credit logjam.
The evidence does not favour Mr Darling. Where possible, lenders mostly have passed on interest rate cuts.
But in the fixed-rate market there are no cuts to pass on, and that's a problem to be laid at the door of the Bank of England, given its independence 11 years ago by Mr Darling's predecessor.
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