UK Mortgages are Poor Value

by Mark Johnston

New research has revealed that the UK’s Banks and Building Societies are making a killing on mortgages. The research has uncovered that the mark up by lenders is the highest in the western world.Borrowers will be shocked to discover that the margin between what banks pay for wholesale money and what they lend to there customers is more than double than what banks in France, Germany and even the United States make.

This, together with the fact that the UK has some of the worlds highest property prices makes it difficult for first time buyers. Banks here in the UK make around 2.5% on top of the wholesale interest rates whilst their American counterparts only add 0.85%. This means a potential home owner looking to buy an average priced property would end up paying over £120 per month more than their American cousins.

Lenders have constantly raised concerns over their ability to secure wholesale funds. The Banks have been very public in pointing out that if they have to pay more for the wholesale borrowing then the cost of mortgage will go up. This seems very unfair when lenders are adding such big mark ups to the UK’s mortgages.

Many first time buyers are finding that they are being priced out of the market which is resulting in a slow down of the property market and as a result it has created growing fears of a price crash. Industry insiders are already predicting drops of up to 25% which could see nearly £40,000 being wiped off the value of a home.

A recent report from the Council of Mortgage Lenders (CML) has already shown a dramatic drop in the amount of funds being loaned to prospective buyers. Between July and August alone the amount from by 15%, from £13.3 billion to £11.4 billion.

Michelle Slade, a researcher from Moneyfacts said: “It’s increasingly evident that banks are using mortgages as a way of repairing their balance sheets. Everyone understands higher risks could have led to bigger mortgage mark-ups than in the past, but that doesn’t mean home loans should be treated as a cash cow.’

Its easy to see where Bank and Building Societies are making their money. Lloyds baking group made a £6.3 billion loss last year but soon recovered by the start of this year. It posted a £1.6 billion profit for the first half of the year even though its reduced its mortgage lending from £78 billion to £35 billion, that’s a 55% reduction!

Bob Parnell of the Council of Mortgage Lenders confirmed that the industry was worried: “There are a few more loans available for those with small deposits than a year ago, but it is still comparatively difficult to access credit,”

Some independent research suggested that the difference between the rate which banks borrow and the rate that they lend to their customers  has increased from around 0.19 present in 2004 and has steadily grown to the current 2.5% today.

Although lenders are still blaming the increased cost of borrowing, insiders have been quick to point out that they are using the opportunity to build up their balance sheets after bad returns last year.

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