Fixed rate mortgage margins increase again

Category: Mortgages
Date: 8/25/2009

Mortgage lenders are showing a continuing reluctance to reduce the cost of fixed rate mortgages, despite a substantial drop in the cost of funding on the swap rates market.

Swap rates determine the rate at which financial initiations borrow fixed rate funding from each other, and have recently fallen by 30 basis points.

However, while banks and building societies have always looked to pass on increases in swap rates, they seem unwilling to pass on any decrease.

In fact, the difference between the average two year fixed rate mortgage (5.18 per cent) and the two year swap rate (2.04 per cent) is the widest margin on record, at 3.14 per cent.

Only a few lenders, including Cheltenham & Gloucester and Nationwide BS have reduced selected rates over the last month. Others, such as Barnsley BS, Chelsea BS and The Post Office have actually increased them.

Many institutions are using their savings books to fund their home loan activity, but just six accounts have benefitted from increased rates in the last 30 days.

"Borrowers looking for a mortgage are continuing to pay a heavy price for previous mistakes made by lenders. Margins continue to be increase as they look to repair dented balance sheets," commented Michelle Slade, spokesperson for Moneyfacts.co.uk.

"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. Savers had been benefitting from the demand by providers to raise money, but this demand seems to have eased.

"The average savings rate stands at 0.84 per cent for variable rate deals and 3.42 per cent for fixed rate deals. Lenders which fund their mortgages through this route are also taking a larger margin than ever before.

"Although tracker rates currently offer much lower rates than fixed rate mortgages, many borrowers are worried about the impact any inevitable increase in base rate will have on their ability to repay their mortgage in future.

"Fixed rates are the preferred option for many borrowers and lenders are cashing in on those seeking a new deal.

"It appears that those looking for a new deal are subsidising the revenue lenders are losing from existing customers on low rate SVR or tracker deals, some of which are currently paying less than one per cent."