Banks Maximize Their Profits at the Expense of Borrowers

Monday 30 March 2009

Borrowers are busy taking out loans as there is evidence that the rates that have significantly fallen will soon go up. However, it is said that banks have not cut fixed rates as much as they should have done; instead, they held back the fall to boost profits. For instance, the cost of funding 2-year fixed loans in the wholesale market has fell by 2.71%, while an average 2-year deal has only been cut 1.72%. Brokers believe that lenders played to maximize their profits as fixed loans are very popular. It has been estimated that 2/3 of loans were taken out in the first quarter of 2009, it is expected that the trend will continue for some time as rates are predicted to increase soon. An average 2-year fixed rate is now offered at 4.62% - 2.39% above the cost of funding, compared to last year figures of 4.94% and 1.4% accordingly. This means that on average borrowers with a loan of £120,000 are paying £1,224 over the odds. The Council of Mortgage Lenders has estimated that given the 33,000 mortgages sold monthly, lenders make an average of £485m a year. It should be noted that 5-year mortgages, which are even more popular among borrowers than 2-year ones, are offered at 5.54% - 2.54% above wholesale rates. Most experts predict that many banks might start rising the price of borrowing as soon as next week in case the base rate stays at the level of 0.5%. Brokers and banking analysts believe that lenders' actions are aimed at pleasing savers at the expense of borrowers. Banks are now competing to offer attractive savings deals for their new customers. However, if borrowers do not fix now, they might end up paying larger sums in the future as the interest rate are expected to go up, while house price will inevitably fall. The best deal on the market is now offered by HSBC: 3.99% for borrowers with a loan of £250,000 or less and a minimum of 40%. The deal features a £999 fee. However, should the base rate rise above 0.5%, the best 5-year deal would be offered at a min. of 4.49%. On the good side, brokers say that the rise in mortgage cost should not be really bad: it is not expected to exceed 0.20% in the short-term.