Why we are paying more for our mortgages.

With bank rate remaining unchanged since March and the cost to lenders of funding mortgages so low, you would be forgiven for wondering why mortgages are becoming more expensive. In the face of mounting criticism for increasing mortgage rates, the lenders position has been laid out in the latest “News & Views” from the Council of Mortgage Lenders and it makes interesting reading. Lenders are less able to vary the rate they charge existing customers as around half of all mortgages are on fixed rates, and a further “significant tranche” is tied to the Bank of England base rate. Lenders also have a greater number of borrowers in arrears, and are having to show greater tolerance with these customers, whereas in the past the number of repossessions may have been higher. Both issues impact on the lenders’ margins, leaving new borrowing as the area they have most control over. Having seen a number of banks failing or being saved by the taxpayer, the regulatory authorities are also demanding they hold a greater level of capital, so reducing their capacity to lend. The double whammy of fewer available funds from the money markets and the requirement that lenders fund more mortgages through deposits, means they also have to fight harder to attract savers. The increased competition means lenders are less able to reduce savings rates when bank rate falls, which leads to higher mortgage rates. Critics have accused lenders of profiteering; because swap rates and Libor which used to dictate the cost of mortgages have fallen by more than the mortgage rates themselves. The CML has rejected this, claiming that many lenders are just not able to raise funds at those low levels. With calls from all corners for lenders to increase mortgage availability, this last comment from the CML could serve as a warning: "A better way of viewing things is to understand that moderately more expensive mortgage deals go hand-in-hand with higher lending volumes”.

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