Interest Rate Update to 22 Septmber 2010

UK Interest Rate: 0.5%

UK Interest Rates Forecast: No major changes likely for the remainder of this year

Are Banks Profiteering On Mortgage Rates?

The credit crunch may in part have been caused by unsustainably cheap mortgage lending, but the figures suggest that banks are making up for this mistake by massively increasing the profit margins on their home mortgage products.

Until the financial crisis, profit margins on mortgages tended to be about 1% - in other words, the interest rate you paid your lender was about 1% higher than the cost the lender was paying to borrow the money themselves.

That's all changed – the average profit margin on home mortgages now has risen to around 2.5% - more than double what it used to be.

A new report published by the Bank of England this week highlighted this trend, saying that by increasing the mark-up on mortgage lending, banks are "rebuilding capital through retained earnings". What this means, in plain English, is that the banks are using their increased profits to refill their coffers, which were brutally emptied during the credit crunch. In normal times, this wouldn't be necessary; banks would either reduce their profit margins to be more competitive or they would pay out more of their profits to shareholders.

The problem with all of this is that while it is necessary for the banks to build up their earnings again, they are doing it to such an extent that the number of new mortgages available is still dramatically lower than it used to be – meaning that the housing market is unlikely to recover much more in the foreseeable future.

Mortgage Lending Falls Again

The number of homes sold in the UK fell by 5,000 to 85,000 in August, according to new figures from HM Revenue & Customs. This also coincided with mortgage lending falling for the second month running, according to figures from the Council of Mortgage Lenders.

Total mortgage lending by CML members was £11.4bn in August – the lowest August figure since 2000.