Despite receiving billions of pounds in taxpayer support during the credit crisis, high street lenders are refusing to pass on the full benefit of historically low interest rates to customers, figures show.
Instead, they have used the cheap cost of borrowing to drastically increase their profit margins.
Bastard Bankers! Hang them! Hang them!
Two years ago, the difference between the rate at which banks themselves borrowed money and the rate they offered to customers for fixed-rate mortgages stood at 1.28 per cent.
Today it has risen to 3.29 per cent for a two-year fixed-rate deal, the highest gap since records began 21 years ago, according to Moneyfacts, the personal finance website.
The increase — which has taken place despite the Bank of England rate remaining unchanged at 0.5 per cent since January 2009 — means that on a £150,000 mortgage, the banks have taken an extra £149 a month for themselves, rather than share the benefit with customers.
This is equivalent to an additional profit of £1,778 in a year and £3,576 over the two-year term.
Umm, wait a minute. They\’re comparing the cost of a two year fixed rate mortgage to the base rate? That\’s not right at all.
If we want to look at the banks\’ margins we need to compare the rate they\’re charging with their own funding rate.
A floating rate mortgage is funded (whether actually so or not it\’s calculated internally on the banks\’ books as being so) from overnight or monthly deposit rate funds, because if that short term rate changes then so does the mortgage rate. A two year fixed rate mortgage is funded, or at least calculated as being so, for this is the risk the bank is taking, as being funded by two year money (and five year by five year and so on)…because if the short term rate changes the bank cannot change the mortgage rate.
So, the correct way of measuring the banks\’ margin is to look at what the two year rate is. And yes, it is higher than the short term rate for there\’s this thing we\’ve got called the yield curve. The longer you borrow money for (except in truly exceptional circumstances when that yiled curve becomes inverted) the higher the interest rate you will be paying.
There is something about this muttered waaay down the piece:
Although the rates paid by borrowers on this type of deal are at almost a seven-year low, experts said they should be even lower because of the lower wholesale cost of borrowing.
It stems from a decline in swap rates – the rate at which banks lend to each other – being greater than the falls in the interest rates paid by borrowers.
I\’m not sure that actually makes sense as it is but it is at least pointing to the right point. That two year mortgage rates are not determined by the base rate, but by the market rate for two year money. Which is higher.
And yes, there were times way back when, when Northern Rock still bestrode the high street like a financial collossus (I think at one point they were one third of all new mortgage offerings?), when the yield curve was inverted and thus two year deals were cheaper than floating rate deals.
So, desperate fail in managing to explain what is actually going on.
But it gets worse of course, for we\’ve also got a desperate logic fail.
Do you remember what happened when the banks were offering all those deals at those lovely low rates? Yes, they all went bust didn\’t they? So, given that we rather like having a financial system (which is why we pumped in all those billions of taxpayer support) we\’re in fact rather happy that they are now pricing things more resonably, are including in their margins enough to pay for themselves, the losses in the future and (yes, there are always losses in the future) in general being able to stand on their own two feet and not need billions of taxpayers\’ money in the future. Hey, maybe even pay back some of what they\’ve had.
I think that\’s pretty good for just one newspaper article, don\’t you? To be wrong in the detail of how much banks actually are making in margin and then wrong as to the big picture of whether we\’d like them to be making margin at all?
Myra Butterworth, please take a bow.