The Council of Mortgage Lenders (CML) is keen to educate Britons about the underlying influences on UK mortgage costs.
The body, which represents lenders funding 98% of the UK residential mortgage market, says it is concerned that some recent coverage of the fixed-rate mortgage market “fails to reflect the complex array of influences on lenders’ pricing strategies”.
According to the CML, swap rates are commonly cited as “the cost to lenders of fixed rate funds”, but the real picture is more complex and a recent decline in swap rates does not necessarily mean that the cost of raising fixed term funding has fallen.
For example, looking at the swap rate does not account for the fact that not all lenders will be able to raise funds at interbank rates in the current environment.
The body also points out that lenders currently have very limited discretion to vary rates on their existing loans.
Around half of all mortgage lending is on a fixed rate basis, a further significant tranche of loans are tied to the bank rate and lenders are also under pressure from politicians to reduce their standard variable rates.
This lack of discretion on existing loans is creating pressures on the sustainable pricing of new business, the CML argues.
In addition, lenders are facing higher costs: they are required to show increasing forbearance to borrowers in financial difficulties and at the same time need to hold more liquid assets and capital as commanded by the Financial Services Authority.
In conclusion, the CML points out: “As lenders will face increasing costs for some time, upward pressure will remain on mortgage spreads on new products. There is no single measure of lenders’ funding costs, which will vary. Spreads on wholesale or retail funds, or against swap rates, are all various pieces of a complex jigsaw. It is misleading to assume that higher fixed rates simply reflect a desire to increase profitability.”
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