The fixed rate loan rip off

UK banks are reaping an extra £3.5 billion a year on fixed-rate mortgages after raising margins to 25 times pre-credit crisis levels.

More than half of all borrowers were taking out fixes as recently as September, despite expectations that rates would fall, because many loan lenders had in effect pulled out of the tracker market.

They have since missed out on the 2 percentage point cut in Bank rate to 3%, costing them £4,000 a year on a £200,000 loan. And research reveals they were already paying over the odds because banks had inflated the margins on new fixes.

Before the credit crunch, lenders were charging 0.10% above the cost of funding so the margin has grown by 2.42 percentage points since July last year, or £3.7 billion on an estimated £12.9 billion of fixed-rate lending.

Banks have continued to raise their margins even though the cost of funding fixes has plunged since June then, the average fixed rate was 6.66%, or 0.14% above the cost of funding at 6.52%.

Last week, Halifax cut two-year fixes by up to 0.96% to 4.99% although it doubled the fee on the deal to £2,000 and its margin is a hefty 1.69% above its funding costs.

The research came a week after banks claimed margins on new mortgages were “desperately thin”, but they focused on trackers and ignored the half of the market going for fixes. About 54% of new borrowers or 130,000 people locked into fixed rates in September.

Analysts warn that the cost of mortgages is unlikely to fall significantly, as lenders hoard cash and seek to protect their margins after large writedowns on bad investments abroad and ahead of further falls in house prices.

Vicky Redwood of Capital Economics, a consultancy, said: “Swaps rates have fallen sharply to reflect expectations of further falls in the Bank rate the market predicts Bank rate will fall to 1.5% by next spring.

“However, we are unlikely to see fixed-rate deals fall significantly. There is a general trend toward widening margins as lenders bolster their position ahead of an expected rise in bad debts.”

Most high-street loan lenders pulled tracker deals after the Bank’s 1.5 percentage point rate cut this month. So far, only Abbey, Halifax and Lloyds TSB have come back into the market, and the rates are so high many borrowers may opt for a fix. Halifax’s trackers are 2.14% above Bank rate at 5.14%, while its best fix is just 4.99%.