Thrifty Loans

Banks have increased their profit margins on fixed-rate mortgages to their highest level of over ten years, as they try to rebuild their profits.

This news comes at the same time as news of an increasing number of cancelled property deals and estate agents offering discounts on asking prices.

Banks are taking an increasingly tough and stubborn stance on mortgages as their lines of credit have been since the credit crunch started last September. Problems which started with the US sub-prime market now mean that banks are having to bolster their balance sheets rather than aggressively take on new customers.

Deutsche Bank figures show that the gap between the cost of borrowing and the rates they are charging customers is at its highest level since 1995. Swap rates were 4.95% at the end of January, but the average fixed rate across the market was 6%.

George Buckley, economist at Deutsche Bank, said: “’On the face of it, banks are having to charge exceptional margins on their mortgage lending right now. But this is not actually a sign of strength in the banking sector. They are keeping interest rates unduly high reflecting a much higher average cost of funding. They simply cannot source sufficient money to lend on to their mortgage customers through normal channels.”

Home loan approvals have slumped to their lowest level since the mid-90s, and news from estate agents only backs up the slowdown in the market. A Bank of England report said: “Estate agencies reported fewer enquiries and instructions. Sale periods had lengthened, and there were reports of a sharp rise in the cancellation of sales. Vendors were commonly accepting discounts on asking prices of 10% or more.”

The Bank has already given warning that hoped-for base rate cuts might not be forthcoming as it battles to keep inflation under control. The CBI says that factory owners are planning to raise prices this year, and wage demands are expected to be higher than for some time.