Lenders’ margins on mortgage products have hit an all-time high over the last week, as the difference between the rates paid by borrowers and the cost of swap rates has widened substantially. The average swap rate on two-year fixed rate money currently stands at 126 basis points (bps), or 1.26%, while the average interest rate charged on a two-year fixed rate mortgage is 4.55%, resulting in an unprecedented lender margin of 3.29% on these products.
Two years ago the margin on a two-year fixed deal stood at 1.28%. The margin leaps even higher to 3.35% on an average five-year fixed rate product and 3.57% on a three-year fix. Michelle Slade, spokesperson for Moneyfacts.co.uk, said: “Mortgage rates are falling, but only a fraction of the reduced funding cost is being passed on as lenders continue to repair their balance sheets. Borrowers will be angered that they continue to pay the price for mistakes made by lenders, particularly those who have accepted government funding.”
Moneyfacts calculates that, going forward, were Bank Base Rate to rise as quickly as it has fallen, and were lenders to maintain their current margins, the average rates charged to borrowers on mortgages could reach around 8%. Slade said in the current market mortgage availability and the maximum loan sizes continue to improve, but there is still a long way to go before any reasonable normality is returned. “Swap rates are the traditional barometer of fixed rate mortgages, but with lenders still nervous of entering the money markets, many are opting for on balance sheet funding through their savings book.”
Andrew Fowler worked for Limetree Financial Services until December 2010. Feel free to contact another member of our team for help or advice.