Homeowners expected to pay £1.3bn bill run up by reckless mortgage lenders

It is estimated that British homeowners will find themselves paying an extra £1.3billion per annum (which calculates roughly at an extra £110 a month in payments) as a result of mortgage lenders’ increased profit margins in an attempt to recover some of their losses which have arisen as the result of bad debts.

Statistics show that lenders have increased their margin fourfold within this last year - a move which consumer groups have called “reckless” and accuse banks of “plundering” homeowners.

Chief executive of the Independent Banking Advisory Service says, “They all got into this position and now the customer is going to pay for it.”

The Deutsche Bank have compiled the new figures and they have analysed the margin between the rate at which the lending company borrows money and the fixed-rate deals it offers. There are even examples whereby the margin has increased eightfold in a year.

Take the example of a homeowner in 2007 who was on a standard 2year fixed-rate deal with a small deposit. Typically they would have aid an interest rate a mere 0.2% higher than the rate at which their lender borrowed the money. Now, that mark-up has increased to more than 1.6%.

This increase is not good news for the estimated 1.4m homeowners whose fixed-rate deals are about to finish this year. The selection of mortgage products available has been considerably reduced and despite falling interest rates, they will be more than likely to have bigger monthly repayments.

Only a year ago, Halifax was so keen to attract new business that it offered a 2 year fixed-rate deal at 5.14% This figure was actually lower than the rate at which it could borrow the money (which was 5.64% at the time). Now the “swap rate” (which is the cost of borrowing for lenders for fixed-rate deals) has been lowered to 4.89%, yet Halifax’s 2 year deal is currently stands at 5.99%.

One of its competitors, Abbey has also taken the steps of increasing the cost of fixed-rates, despite a fall in borrowing costs. This trend is becoming widespread with the margin on fixed-rates averaging 1.05%, compared to 0.255% only a year ago.

A spokesman for Charcol (an online mortgage broker) believes that lenders are writing new fixed-rate business at better margins than they have done for years and that where they have had to make big write-downs on mortgage-backed securities, they then have got to find a way to replenish their balance sheets, and the only way they can do that is to make bigger profit margins or issue new shares.

A Council of Mortgage Lenders spokesman said the market had been “extremely competitive” but some of the deals on offer a year ago were “not sustainable in current market conditions”.