Fixed rate loans mean profit for banks
Some industry experts have recently claimed that many banks are now making profits from fixed rate mortgage loans by increasing their profit margins sharply on these popular loans.
It is claimed that as a result of charging more than they should be on fixed rate loans banks and building societies are enjoying additional profits of up to £500 million a year collectively, and it is the customers that are paying for this increased profit by paying more than is justified on their mortgage loan.
The report indicates that the margin between the amount of interest that banks and lenders pay to get finance on the wholesale money markets and the amount that they then charge in interest to customers has increased by around 70 percent in the space of just one year.
For example, the average rate of interest on a two year fixed rate mortgage is around 4.62 percent, but with the lower profit margins seen just twelve months ago the average rate would have been far lower at just 3.63 percent.
One finance industry expert recently stated: ‘Lenders have played this cycle to maximum advantage. Fixed deals, which are growing increasingly popular, have not been cut by nearly as much as the cost of funding has fallen – and once you are in, the lender has you captive.’
She added: ‘The cost of wholesale borrowing is expected to rise, which lenders will soon be forced to pass on to mortgage customers. We appear to be near the bottom of the market and homeowners looking for security would be wise to secure a longer-term fix as soon as possible, preferably for five years.’
Another official said that fixed rate mortgages are likely to start going up soon despite the low base interest rate. He said: ‘It doesn’t look as if fixed rates are going to get much cheaper, even if Bank rate stays at 0.5% until well into next year.’
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