Bailed-out banks are ripping us off

by Mark Adams on 19 March 2010  |  13 comments
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Lloyds and the other struggling banks were given £185bn in bailouts - and they’ve repaid the favour by charging steep premiums for mortgages

This week, Lloyds surprised most of the business world by announcing it expected a return to profits in 2010.

The lender said its performance so far this year had been 'strong' - no wonder, as it, along with all of the other bailed-out banks, has been ripping us off.

Quids in for the banks

The fact is, big banks haven’t done too badly out of this credit crisis. Under its special liquidity scheme, the Bank of England lent struggling financial institutions some £185bn between April 2008 and January 2009.

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Between March 2009 and March 2010 the average level on interest charged on two-year tracker mortgages fell by just 0.05% - and the average cost of a two-year fixed-rate deal actually rose by 0.16% to hit 3.92%.   

And it’s the State-backed banks - like Lloyds - who have squeezed borrowers most of all.

New figures from financial analysts Moneyfacts show that Lloyds, Royal Bank of Scotland and HBOS have all increased their margins on mortgage lending over the past year.

How rates have risen

The survey of prices for two-year fixed rate mortgage deals shows how lenders such as Lloyds TSB-owned Cheltenham and Gloucester, Halifax and Northern Rock have struggled to meet the grade compared to the market average.

Between March 2009 and March 2010 two-year deals from all three lenders were priced well above the average for deals requiring a 25% deposit. March 2009 saw Halifax - part of the Lloyds Group, remember - hit borrowers with a premium above a full percentage point of 5.48% when the market average was just 4.30%. Today, the Halifax rate is 4.27%, just above the market average of 4.19%.

Lloyds TSB-owned C&G, meanwhile, has extended the margin it charges over the course of the year. In March 2009, it charged 4.42% - 0.12% above the average - but today its two-year fix at 4.57% represents a premium of 0.38%. Northern Rock - 100%-owned by the taxpayer – held its rates well above average for 11 of the past 12 months, peaking at 5.04% during August 2009, when the average two-year fix was just 4.68%. 

Some of these premiums can be explained - stricter rules for building societies over funding and capital reserves imposed after the credit crunch have made it harder for building societies like Nationwide to compete. Rules governing the balance sheets of state-owned banks have also made it harder for them to appease the Government by extending lending.

Even so, with interest rates at near-zero and the two-year index of ‘swop rates’ - the rate at which banks lend to one another - falling from 2.56% to 1.55% during the course of the year, it’s clear that banks of all stripes are enjoying increased returns on mortgage lending.

Analysis in one national report found that Royal Bank of Scotland has widened its mortgage profit margins in the past year from 2.54 percentage points to 3.02 points - that’s an additional £960 a year on a £200,000 home loan. 

And increasing profit margins is not what the big banks promised the Government at the time of the bail-out...

• Watch this video: Cut the cost of your mortgage!

Where to find better deals

Fortunately, low interest rates have helped inject some competition between certain mortgage providers - particularly since the turn of the year. Be aware that these rates will only be available to those borrowers with healthy credit ratings - and that you can check the status of your credit report with a free trial from reference agency Experian.

If you want the peace of mind a fixed-rate mortgage with fixed monthly repayments offers, the Yorkshire Building Society currently tops the best buy tables. Its two-year fix is priced at 3.09% - but be aware that you’ll need a 40% deposit to qualify and that it comes with a hefty £1,195 arrangement fee. Elsewhere, the Co-operative is offering a two-year fix at 3.19%. The loan, which is available through both The Co-operative Bank and Britannia, is available with at least a 25% deposit with a £999 fee.

If you don’t want to pay an upfront arrangement fee, First Direct offers a two-year fix at 3.69% for borrowers with a deposit of at least 35%. 

My favourite base rate tracker deals are First Direct’s 2.39% tracker deal which again requires a deposit of at least 35% and has a £499 fee, and the HSBC Base +2.09% offer, available for two years with a minimum 40% deposit.

For those wanting to borrow a larger sum, Santander offers an alternative two-year tracker at 3.25% for a minimum 20% deposit and Yorkshire has a two-year tracker currently available at 3.79% on a minimum deposit of just 15%.

• Watch this video: Britain's mortgage timebomb

What next for Lloyds

Despite this extra competition, the hope has to be that a return to profit will see Lloyds, and the rest of the banks that are backed with our money, cutting their products to fairer levels. It's one thing for Lloyds to return to the black, but they are doing it at our expense.

More: Five ways to make thousands from your home! | The street where homes cost £7m!

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 4045 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 will revert to the lender's standard variable 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.