Are lenders ripping us off when it comes to fixed rates - or should you go for one before the best deals are withdrawn?
Last week it was revealed that fixed rate mortgage margins are at an all-time high, sparking complaints of lender profiteering.
Many blame the mortgage industry for kick-starting the credit crunch and subsequent recession, plus with a number of lenders getting taxpayer bailouts, the idea that they are making bigger profits out of mortgage borrowers is difficult to swallow.
So what’s the score with margins and mortgages?
Wide gap
According to financial information provider Moneyfacts, the margin between mortgage rates and the cost of funding to lenders through the swap rate market now stands at an all-time high.
- The average two-year fix is 4.55% compared to a swap rate of 1.26%, meaning a margin of 3.29%
- The average three-year fix is 5.13% compared to a swap rate of 1.56%, meaning a margin of 3.57%
- The average five-year fix is 5.48% compared to a swap rate of 2.13%, meaning a margin of 3.35%
Moneyfacts points out that two years ago the margin on a two-year fixed deal stood at 1.28%, compared to 3.29% today.
And it reckons that this increase in margin means that on a £150,000 mortgage, a borrower is repaying £149 per month more, equivalent to an additional £3,576 over the two-year term.
Even scarier, it says that borrowers could see interest rates as high as 8% if Base Rate rises as quickly as it fell and lenders retain their current margins.
But hang on a minute. I think these figures are a bit too simplistic, and paint lenders in a worse light than they deserve. That’s right, I’m defending mortgage lenders!
Increased costs for lenders
Fixed rate mortgages are indeed high in relation to swap rates, especially compared with two years ago. But remember how different the world was then -- before the collapse of Lehman Brothers and the Lloyds TSB takeover of HBOS.
Mortgage margins were narrow before the credit crunch, incredibly narrow, because lenders could access very cheap credit very easily on the wholesale funding markets and then price really low because they were lending at incredible volumes. Of course, we now know that was unsustainable.
Since then everything has changed, including the way lenders access funding. Their trade body, The Council of Mortgage Lenders, has repeatedly pointed out that swap rates alone do not reflect the costs of fixed rate funding for lenders.
So when swap rates fall, as they have done recently, it doesn’t necessarily follow that fixed rate mortgages will. It’s pretty complex (and dry) stuff but in essence, not all lenders can borrow at these swap rates, especially in the current climate.
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They have also faced much higher costs in the last 18 months, including the cost of showing increasing forbearance to borrowers in difficulty, the increased costs of holding more capital as required by the regulator, the increased costs of attracting retail savings and many other factors that make it more expensive for them to do business.
The point is there isn’t a single measure of lenders’ funding costs, as they vary between organisations, and they have changed hugely over the last few years.
So it’s not just the case that lenders are charging higher fixed rates just because they want to increase their profitability. Although obviously, this is a factor too -- just not the only one!
And the sad truth is that because lenders simply don’t have the funds to lend large volumes like in 2007, they don’t need be so competitive to get enough business. Demand is still greater than supply, and they are businesses after all.
Fixed rates still low
The other thing that is worth considering is that fixed rate mortgages are currently extremely low -- in fact these are some of the best deals for years. Of course, with Base Rate and (and swap rates) so low, many people expect mortgages rates to be even lower, but isn’t there a point at which we can recognise that a two year fix at under 3% and a five year fix at under 4% are just simply great deals, and never mind the margins?
Lenders are not likely to reduce their margins while Base Rate remains at 0.5%, but equally they are not likely to maintain them if Base Rate rises as fast as it has fallen. Indeed, a rise could help the pricing of new mortgage products because what is really costing lenders at the moment is the millions of borrowers lingering on super low reversionary rates. If they could make a bit more money out of these people with a few rate rises, they might be able to ease margins on new lending a bit.
Best buys
As has been the case for so long, the best mortgage deals on offer are to those with a deposit of 25% or more, and a handful of lenders are pricing pretty aggressively in this sector.
But if you have just a 10% deposit, or equity in your home, unfortunately your choice is still severely restricted and rates are still pretty steep.
Whatever your deposit size, below are some of the best fixed rates available right now, and wide margins or not, some of them are pretty tasty deals for those who want to protect themselves from possible interest rate rises.
16 super low fixed rates
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
2-year fix |
2.64% |
2% |
70% |
|
|
2-year fix |
2.79% |
£945 |
60% |
|
|
2-year fix |
2.85% |
£1,495 |
65% |
|
|
2-year fix |
2.89% |
£1,295 |
70% |
|
|
2-year fix |
2.89% |
£995 |
75% |
|
|
2-year fix |
3.49% |
£999 |
80% |
|
|
2-year fix |
3.69% |
£945 |
80% |
|
|
3-year fix |
3.69% |
£895 |
80% |
|
|
3-year fix |
3.89% |
£195 |
75% |
|
|
3-year fix |
3.94% |
£995 |
85% |
|
|
5-year fix |
3.95% |
£599 |
60% |
|
|
5-year fix |
3.99% |
£995 |
75% |
|
|
2-year fix |
3.99% |
£995 |
85% |
|
|
2-year fix |
4.95% |
£995 |
90% |
|
|
5-year fix |
5.39% |
£495 plus £250 cashback |
85% |
|
|
5-year fix |
5.89% |
£499 |
90% |
Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.