Wednesday, Aug 12, 2009
Something to consider before signing a mortgage
Telegraph: Banks profiteering on mortgages with record gap between borrowing and lending rate
"The difference between the interest rate that banks charge and the rate at which they borrow is the biggest since the Bank of England started collecting data 15 years ago. The figures demonstrate that, two years after the credit crunch began, consumers are being hit harder than ever, despite the Bank cutting interest rates to an all-time low of 0.5 per cent." Guess what happens when rates rise?
Posted by quiet guy @ 07:59 AM (461 views) Add Comment
4 Comments
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1. paul said...
But of course, the joke is collectively on them.
This is the tragedy of the commons in action - individually these banks want the market to turn around so that they can revalue their toxic assets. Collectively though, their uncertainty makes them horde and they condemn the banking industry and themselves to decades of anaemic profits and slow death.
2. Pooodle2 said...
Wish they'd get over saying the banks can borrow at 0.5%. If they could do that why would they be paying be over 3% on my STR cash.
Bank of England base rate means nothing anymore, but guess it makes the headline look better and gives politicians a stick to bash the banks with and divert attention from themselves.
3. Andy said...
I wouldn't call a 2% risk premium in the current climate "profiteering", and a mortgage fixed at 5.7% for five years doesn't look like too bad a deal. If I had the money, I wouldn't want to lend out 300k to someone, backed only by a 3-bed semi and a 20% deposit, and only demand 5.7% pa over five years in return.
4. mark wadsworth said...
I agree with Paul, Poole2 and Andy.
The whole article is complete rubbish.
The much-vaunted 0.5% rate is not the rate at which banks can borrow FROM the BoE, it is the rate that BoE pays banks on their deposits TO the BoE. Banks have, on the whole, very large deposits with BoE, so the rate at which they could borrow (which is called Standing Lending Facility) is a lot higher than 0.5% but irrelevant anyway. Then there's the Lender of Last Resort rate, which is higher still.
The overall interest rate that banks are paying is a mish mash of interest on deposits, interest on bonds (most of which are long term, i.e. the rates were set years ago), insurance paid to BoE, interest paid to HM Trewasury on preference shares etc etc, and is a million miles from 0.5%.
As it happens, the long-run average spread between mortgage rates and average total borrowing rates is about 2%, you'd expect it to be on the high side at the moment as banks need to factor in much higher losses on loans that go bad. If they can keep those losses below 2% then I think that is pretty good going, myself.