BBA issues factsheet on factors underlying mortgage interest rates
The factors influencing the cost of mortgages include customers' deposits, wholesale money markets, the Bank of England base rate and regulatory reform, a new BBA factsheet explains.
The factsheet “Your Mortgage and the Markets” sets out the main considerations which banks will have to take when setting mortgage interest rates. It sets out how the mortgage market has changed considerably since the end of the easy-credit era in 2007, and explains why economic indicators such as the Bank of England base rate or wholesale money market rates no longer reflect the actual cost to the bank of providing mortgages.
In short, the cost at which banks raise funding – from retail depositors or the wholesale markets - have increased substantially compared to historical standards:
while banks will still fund themselves using a mix of wholesale money and deposits, the balance has been shifting as regulators encourage banks to fund a greater portion of their mortgage portfolios with longer term retail deposits provided by savers;
where banks borrow money from savers, they presently do so at rates of up to two to three per cent higher than the Bank of England base rate (currently standing at 0.5 per cent): the direct opposite of the situation before the credit crunch, when savings rates were typically below the base rate;
some lenders have continued to face much higher borrowing rates in a tighter wholesale money market;
regulators now require UK banks to hold more than twice the capital that they were holding before the credit crunch. There is a cost associated with holding these higher amounts of capital;
the securitisation market, which enabled banks in the past to convert parts of their mortgage book into attractive financial products for big investors is yet to return to its previous activity levels;
although mortgage defaults and repossessions are being kept as low as possible, inevitably the lending risk has gone up. The banks are also helping customers in financial difficulty to stay in their homes, but are at the same time being required by the FSA to hold more capital against mortgages subject to such forbearance programmes.