Last figures from the Bank of England shows that profit margins on mortgages have soared over the past two years, despite the official interest rate falling from 5.75% to just 0.5% - the lowest level ever.
Five-year fixed deals are now at their highest mark this year, while the margin on two-year deals has increased more than ten-fold from 0.32% in July 2007 to 3.39% today.
Mortgages are not the only type of loan where the margin over the base rate has risen. Overdraft rates have increased from an average of 17.73% in July 2007 to 18.97% in the same month this year - the highest level since records began. The margin on this type of lending, meanwhile, has soared from 11.98% two years ago to 18.47%.
Loans too now cost an average of 13.1%, the most expensive since 2004, while credit card rates have increased from an average of 15.22% (giving a margin over the Bank of England base rate of 9.47%) to 15.87% - a shocking 15.37% margin over base.
Meanwhile, savings rates have taken a battering from the historically-low base rate. The average instant access account paid just 0.15% in July this year, down from 2.52% in 2007.
Date Base Rate Two-year fixed mortgage* Margin over base rate Instant access savings account**
July 2007 5.75% 6.07% 0.32% 2.52%
July 2008 5% 6.35% 1.35% 2.24%
July 2009 0.5% 4.46% 3.39% 0.15%
* Monthly interest rate of the average two-year fixed-rate mortgage up to 75% LTV
** Monthly interest rate of the average instant access deposits Source: Bank of England
The base rate, which is set by the Bank of England's Monetary Policy Committee each month, has fallen from 5.75% in July 2007 to just 0.5% today. The central bank says this monetary policy is designed to control inflation and help struggling borrowers and businesses weather the recession.
With house prices crumbling and confidence in property hitting a wall, the move also aims to underpin the housing market.
However, taking the average loan rates at face value, it looks as though banks and building societies are raking in the profits from loans such as mortgages, despite the record-low base rate.
Rip-off banks or sign of the times?
So, is this a sign that banks and building societies are taking advantage of the credit crunch and charging consumers more during a time when money is tight? Or is this just a sign of the times?
Brian Mairs, spokesman for the British Bankers' Association, says the perception that base rate forms the basis for lending is inaccurate. “No one is going to be able to borrow money at 0.5%,” he adds.
David Hollingworth, a mortgage expert at London & Country, agrees, and points out that there is not a direct correlation between the base rate and mortgage rates. This is because mortgage lenders mainly use swap rates – the cost of funding from the wholesale markets (the rate at which banks lend to each other) – to price their fixed-rate loans.
According to Ray Boulger, senior technical manager at John Charcol, the key factor influencing swap rates is what the money markets think the Bank of England base rate will do in the short to medium term. Over the past few months, swap rates for two-year loans have fluctuated between 1.9% and 2.3%, an indication that the markets believe the base rate will rise over that time.
Although the cost of wholesale mortgage funding is higher than the base rate, Hollingworth still believes that many lenders have increased their margins over the past two years, with most looking to take a bigger profit from the loans they issue.
“In 2007, there was no margin in lending, and the sheer amount of competition meant there wasn't a lot of money to be made from mortgages,” he explains. “With wholesale funding for mortgages drying up over the past few years, it's natural that banks are seeking more profit from the loans they do issue. This isn't about greed – it's more about the fact that demand for mortgages continues to outstrip supply.”
In addition, the recession means banks have to be more careful with the money they have. “The state of the economy means money is scarce, and the money that is available is expensive,” says Mairs. “For banks, there is also a higher risk that borrowers will default on loans during a recession, therefore they need to price their loans to reflect these factors.”
It also comes down to banks and building societies wanting to limit the amount of business they receive from borrowers. Lenders that price their mortgages too competitively in the current market, risk receiving a surge of interest that they simply can't cope with, says Boulger.
The problem with comparing the market today with the market two years ago is that neither situation is right. “We shouldn't see 2007 as a yardstick for a ‘normal' mortgage market,” says Mairs. “The years before the credit crunch hit were an era of cheap credit, and this was not sustainable.”
Hollingworth agrees that there is little point in looking backwards: “We certainly shouldn't expect things to go back to the way they were pre-credit crunch.”
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( 2.9 / 135 )You may recall that we suggested writing your MP's to get them to sign the petition. I thought I would try and get my local MP and the EMP to sign up for this. Please all be advised that the EMP (Euro MP) will write back to you with a lovely letter saying they cannot!
Hopefully the normal MP's will band together to provide a sufficient number of people on this anyway
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( 3 / 128 )There is definitely food for thought for the professional Contractor when considering the statistics in the news this week. It may be premature to start talking about “green shoots”, particularly for those Contractors on the receiving end of cost restructuring by their clients. The Lloyds Banking Group and Shell have been recent culprits, with the latter enforcing a 12% rate cut or contract termination for UK based freelancers. However, there has been some more positive news in the wider economy this week.
House prices have shown their first quarterly rise since October 2007, according to the UK’s largest mortgage lender. The Halifax house price index shows prices from May to July were 0.8% higher than in the previous three months. So far this year, the Halifax index states house prices have fallen by less than 1%. Are these tentative signs of recovery for Contractors thinking of moving?
More figures extended the positive trend, after building society Nationwide reported that the average value of a UK home rose by 1.3% in July. The number of mortgages approved for house purchases has also risen for five months in a row to the highest level for more than a year. Has lending policy finally relaxed enough for contractors, to allow the financing for that delayed move?
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( 3 / 126 )Suppose that every day, ten men go out for beer and the bill for all ten comes to £100.
If they paid their bill the way we pay our taxes, it would go something like this.
The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
The tenth man (the richest) would pay £59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by £20." Drinks for the ten now cost just £80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected.
They would still drink for free. But what about the other six men? The paying customers?
How could they divide the £20 windfall so that everyone would get his fair
share?'
They realized that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so the fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid £2 instead of £3 (33% savings).
The seventh now pay £5 instead of £7 (28% savings).
The eighth now paid £9 instead of £12 (25% savings).
The ninth now paid £14 instead of £18 ( 22% savings).
The tenth now paid £49 instead of £59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a pound out of the £20,"declared the sixth man. He pointed to the tenth man," but he got £10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a pound, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get £10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, this is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction.
Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who don't understand, no explanation is possible.
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( 3 / 116 )Tax Rates Next Year
Not only are the tax rates going up. Personal allowances will gradually be reduced to nil for individuals with “adjusted net income” above £100,000. This will be reduced by £1 for every £2 above the income limit. This will give a 60% marginal income tax rate on the income between £100,000 and £112,950.
As per my previous comments I am not sure how HMRC thinks this will benefit the UK as this will simply cost employers more in higher wages to compensate for the tax. This is also likely to lead to the senior banking sector having to follow suit, which could invariably lead to the same melt down as seen over the last year - what a great economic plan this is!!
Worse than that a lot of well paid people that I talk to are looking at ways to try and 'avoid' this which is even more of a concern, because HMRC will then get themselves caught up trying to catch people using tax avoidance schemes.
If anyone needs help planning then please let us know and we can try and review how these changes will impact your net income.
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