UK mortgages `are overpriced'

British lenders' margins are twice as high as those on the Continent, w rites John Willcock

British banks and building societies charge margins on mortgages that are on average twice as big as those levied by their Continental equivalents.

However, due to overcrowding in the UK financial markets and the intense competition that this leads to, margins on mortgages are likely to fall in the coming years.

Put crudely, many banks and building societies could still be making reasonable profits if they charged £50 per month less for an £80,000 mortgage. That is the difference between charging a 2 per cent margin, a rough industry average, and the 1 per cent margins more common on the Continent.

The mortgage margin is the interest charged by the lender above the cost to the bank or building society of raising the funds, either from its own depositors or from the London money markets.

Most banks and building societies have just raised their normal floating mortgage rates to over 8.5 per cent in reaction to the December base rate rise. According to recent research by Merrill Lynch, the American securities house, rates could have been limited to 7.75 per cent.

It is difficult to explain precisely why this disparity has arisen. Much is due to the fact that building societies have to offer attractive rates to their depositors to attract the funds that they then lend out in the form of mortgages. Societies have been loath to lose this form of "cross subsidy".

Also, the UK banks and building societies have traditionally tended to move together, and while they do not actually fix the prices between them, increased competition has not yet been translated into a mortgage price war.

The report by Merrill Lynch, written by Ian McEwen, first vice-president, and Abigail Leach, industry analyst, says: ". . . relative to risk UK variable rate mortgages are very much overpriced. The beneficiaries of this overpricing are, of course, the building societies and banks themselves - but also to some extent the retail depositors of the building societies, who in effect have a service that is subsidised by the societies' borrowing members."

The good news is that Merrill Lynch expects mortgage margins to fall. The report points to the entry into the market of aggressive new lenders like Direct Line, the Royal Bank of Scotland subsidiary. When it was launched, Direct Line started offering mortgages that undercut its parent bank by a full 1 per cent.

Similarily, Bank of Scotland Mortgages Direct is charging lower rates than its parent bank, again because it does not have to cover the costs of running a branch network.

The proposed merger of the Halifax and Leeds building societies and their proposed conversion into a bank removes the building society industry's flagship. The new business will provide a full range of financial services, which Merrill Lynch thinks will lead to a decline in cross-subsidies. This will be another force driving mortgage margins down.

Sadly the practice of trying to confuse new mortgage customers with fancy-sounding discounts, and disguising the real long-term costs of a mortgage, will probably continue.

The Merrill Lynch report says that providers of such discounted schemes, which might offer a big chunk off interest rates for the first two years, still have to cover their costs. This means that the lenders must get the borrowers on to a higher variablerate and keep them there for a number of years in order to make money on the mortgage.

They do this through high penalty charges for getting out of the mortgage, of up to three months' interest payments. The flashy discounts or cash-back offered in the first few years distract the customer from the fundamental price of the mortgage over the whole of its life.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Chelsea are interested in loaning out Romelu Lukaku to Everton again next season
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
News
people
Extras
indybest
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

    £450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Senior Analyst - ALM Data - Banking - Halifax

    £350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

    Java developer - Banking - London - Up to £600/day

    £500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
    How live cinema screenings can boost arts audiences

    How live cinema screenings can boost arts audiences

    Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
    Shipping container hotels: Pop-up hotels filling a niche

    Pop-up hotels filling a niche

    Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
    Native American headdresses are not fashion accessories

    Feather dust-up

    A Canadian festival has banned Native American headwear. Haven't we been here before?