Bank says lenders are not pricing mortgages in line with base rate
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Lenders are failing to price their mortgages in line with the low base rate, according to a report by the Bank of England.
It says that during the financial crisis the base rate has reduced sharply, but the rates on new lending have not, and in some cases have risen.
The report blames this on lenders’ funding costs, credit risk charges and a residual, which refers to the operating costs and the mark-up enders apply to the mortgage.
It says a main factor included in the residual is the mark-up that lenders charge over their marginal costs, which ensures that each loan extended generates an expected rate of return.
The report says: “During the financial crisis, funding costs rose sharply and the residual became negative. It is possible that lenders were surprised by the persistence of higher funding costs and so may have been slow to update the pricing of new mortgages. Since 2009 the residual has increased markedly.”
It adds lenders are seeking to rebuild net interest margins, partly through higher mark-ups on new lending.
Bob Pannell, chief economist at the Council of Mortgage Lenders, says: “The fact that lenders are seeking higher returns on new business is a logical response that should help them rebuild capital, improve investors’ perceptions and bear down on funding costs over time.”
Meanwhile, the Council of Mortgage Lenders revealed last week that gross mortgage lending plunged 14% in August to an estimated £11.4bn. This is the lowest August lending figure since 2000, down from £13.3bn in July and a 6% fall from £12.1bn in August 2009.
Paul Hunt, managing director of Phoebus Software, says: “What is incredible is that 82% of these mortgages came from just five lenders - a situation that needs to be rectified.
“Next year, some of these lenders will be hampered by the new capital adequacy requirements for Basel III and the need to start paying back government funding.”
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