Banks' profit margins hit record levels

Banks are are cashing in by raising their interest rates, research for The Independent has revealed. Despite the Bank of England last week keeping the base interest rate at a record low of 0.5 per cent for 27 months in a row, the rates which lenders charge customers have risen, in some cases by almost 50 per cent.

The differential between most lending rates and the minimum rate is up to five times what it was just four years ago. Analysts at Defaqto examined rates on personal loans, mortgages and credit cards over the last four years and the results make shocking reading.

In July 2007, the base rate stood at 5.75 per cent. It is now 5.25 per cent lower but lending rates across the board have travelled in the opposite direction. Average unsecured personal loan rates have climbed almost 50 per cent, from 8.1 per cent in 2007 to 11.8 per cent now.

But when you examine the differential between base rate and personal loan rates, the figures really are surprising. In 2007, the differential was 2.35 per cent. Now it's 11.3 per cent. So the differential between personal loan rates and the base rate is almost five times as high as it was four years ago.

However, the increase is partly due to the end of the payment protection insurance racket. Since banks were forced by the Financial Services Authority to give up the profits they made from selling the often useless insurance to customers, they have clawed back profits by increasing the interest rates they charge.

David Black, banking analyst at Defaqto, says: "One of the reasons that unsecured loan rates have increased is that loan providers are no longer earning commission from payment protection insurance sales. Providers generally are tightening their credit policies and are increasingly limiting unsecured loans to their existing customers."

There's a similar story of rising rates when credit cards are examined. The average credit card APR is now 18.7 per cent, up from 16.6 per cent since July 2007. But the differential between average credit card APRs and the base rate has climbed from 10.85 per cent to 18.1 per cent.

Mr Black says: "Credit cards have become much harder for people to obtain over the course of the last few years and, at the same time, we have seen a significant increase in the standard interest rates that they charge."

Part of that, he says, is due to the introduction of personal pricing, which means some borrowers are charged much more if they are seen as a high risk. "Personal pricing – where cardholders may be charged different rates of interest for the same card based on the individual's perceived credit risk – is now firmly entrenched in the credit card industry," he warns.

At first glance, average mortgage rates seem to have performed much better. The average rate for a two-year base-rate tracker mortgage at 90 per cent loan-to-value has actually fallen over the past four years from 5.95 per cent to 5.4 per cent.

But in July 2007 that would have meant the mortgage deal was just 0.2 per cent above the base rate.

Now it is 4.9 per cent above the base rate, producing a real increase of 4.7 per cent. The differential has surged by more than 23 times because the 2007 mortgage market was much more competitive, says Mr Black.

"The margin over bank base rate charged by base-rate tracker mortgages has increased dramatically since the autumn of 2007, when competition drove the margin to wafer-thin levels," he says.

"Those who took out a base-rate tracker then will have enjoyed spectacular financial benefits compared to others who opted for a fixed-rate mortgage in 2007 instead," he adds.

2.35 per cent: The margin between base rates and personal loan rates in 2007

11.3: The margin now