The Bank of England Base Rate has been at its historic low of 0.5% for six months, giving many mortgage borrowers a welcome bit of breathing space during the recession -- especially those on variable rates.
Despite arrears levels running high, we can only guess how much higher they might have been if people were forced to pay significantly higher monthly mortgage repayments. And of course, this problem may still occur as and when rates start to go up again.
But even though mortgages are not currently expensive when you look at long-term trends, neither are they quite as cheap as you might expect considering just how low the Base Rate, the London-InterBank Offered Rate and Swap Rates are. These underlying rates reflect lenders' own borrowing costs so it might seem reasonable to think that mortgage rates would rise and fall in relation to them.
However, data released by lovemoney.com partner Moneyfacts this month shows that in the six months during which Base Rate has been stable mortgage rates most certainly haven't.
In fact, it claims that since 5th March 2009 (when Base Rate was lowered to 0.5%), consumers have been hit by falling savings rates and rising costs on mortgages, personal loans, credit cards and overdrafts.
So what's going on?
Mortgage rate movement
According to Moneyfacts, despite Base Rate being at an all-time low for six months, 'only providers are feeling any real benefit'.
It suggests that those borrowers looking for a new mortgage deal have been dealt the hardest blow, as lenders have been increasing their margins in order to repair their balance sheets.
Average two-year fixed rates for example have increased from 4.84% to 5.15% in the last six months, and their margin over two-year swap rates (a key element in lenders' funding costs) has widened by a significant 0.63%.
Plus, despite tracker rates having fallen slightly over the last few months, their margin over Base Rate has actually widened since rates were last cut.
The table below highlights the average margins between Swap Rates (which reflect lenders' fixed rate funding costs) and fixed rates, and between Base Rate and tracker rates .
|
|
5th March 2009 |
5th Sept 2009 |
Change |
|
Fixed rates |
|
|
|
|
2-year margin over swaps |
2.58% |
3.21% |
+0.63% |
|
3-year margin over swaps |
2.83% |
2.98% |
+0.15% |
|
5-year margin over swaps |
2.62% |
2.89% |
+0.27% |
|
Tracker rates |
|
|
|
|
2-year margin over Base |
2.86% |
3.22% |
+0.36% |
|
3-year margin over Base |
3.15% |
3.25% |
+0.10% |
|
5-year margin over Base |
2.89% |
3.22% |
+0.33% |
Source: Moneyfacts
The Council of Mortgage Lenders has been quick to point out that there are far more complicated factors and costs for lenders to consider when pricing mortgages, not just Base Rate and Swap Rates.
They argue that simply looking at these margins does not give any indication of lenders' profits.
Seducing savers
The CML highlighted for example that most lenders are relying more on retail savings to fund their lending than in previous years, and the cost of attracting savers is relatively high.
It's true that some savings rates have increased over the last six months, despite Base Rate remaining low -- average fixed rate bonds have jumped from 2.71% in march to 3.28% now -- an increase of +0.57%.
But not all savers are benefiting. Easy-access accounts have actually seen average rates fall in the last six months from an average of 0.98% to a paltry 0.77% (though have increased slightly in the last few weeks).
Cash ISA rates have also fallen, by 0.30% to just 1.46%, so the idea that banks and building societies are having to offer huge rewards to savers in order to provide mortgage funds only goes so far.
Further factors
However, the CML also says that lenders are juggling lots of other costs that all impact on their pricing.
These complex responsibilities include:
- ? The cost of structuring the particular product they are offering
- ? The cost of matching the maturity of their lending to the maturity of their funding
- ? The costs of administering the account
- ? The costs of holding the capital needed against the lending being done
- ? The risk they perceive inherent in the loan
- ? Expenses and costs that could not have been foreseen before the credit crunch and which affect the new business being written now (these were not detailed by the CML).
All of these pressures are causing a change in the relationship between benchmark rates (like Base Rate and Swap Rates) and mortgage rates compared to the pre-credit crunch era, claims the lender body.
Great, so does that mean that, when Base Rate starts to rise, lenders won't necessarily pass on the increases to mortgages rates - because the two don't correlate anymore?
I wouldn't hold your breath!
I'm more than happy to accept that the intricacies of mortgage funding and pricing are lost on little old me -- though I am not sure why many of the pressures listed above would have got any more severe in the last six months. It's not as if everything was rosy back in March so wouldn't any break in the link between Base Rate and mortgage rates have happened before then?
It's all a tad complex for me.
Ultimately though, their excuses don't matter. What does matter is how these widening margins affect our pockets, regardless or whether or not they mean more profit for the lenders.
Ticking tracker time bomb
And the problem with wide margins on an uber-low Base Rate is that the actual payrate currently doesn't look very expensive, so it's easy for borrowers to be blasé about what they are taking on.
For example current average two-year tracker margins of 3.22% make for reasonably low sub-4% mortgages with Base Rate at just 0.5%.
Imagine Base Rate at 5% though (which is not historically high) and those same trackers would be charging a payrate of 8.22% - ouch!
If you are thinking about getting a tracker rate its essential you look at this margin and work out what your repayments would be if Base Rate was to increase modestly or even significantly -- this advice is also vital for those looking at discounted and standard variable rates which are also likely to rise.
Because one thing is certain --- the Base Rate is not going to stay at 0.5% forever.
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