Margins hit new high on fixed-rate deals

The average cost of a fixed-rate loan has been falling steadily since the beginning of the year as lenders try to tempt homeowners to remortgage off low standard variable rates.

But despite the fall in mortgage rates, the margins lenders are charging on the deals have actually increased, according to financial information group Moneyfacts.co.uk

The average cost of a five-year fixed-rate mortgage is now 5.56 per cent, a record 3.11 per cent more than a five-year swap rate, upon which the deals are partially based.

The margin being charged on three-year fixed-rate mortgages is also at a new high of 3.38 per cent on an average rate of 5.15 per cent.

Margins on two-year fixed-rate deals are 3.14 per cent , the highest level since March this year, despite the average cost of one of the products falling from 4.93 per cent in January to 4.54 per cent now.

Michelle Slade, spokeswoman for Moneyfacts.co.uk, said: "Competition has returned to the mortgage market, but while rates are at their lowest levels in seven years the margins taken by lenders continue to increase.

"The mortgage market remains disjointed from the swap rate market, which has traditionally been the barometer of fixed-rate mortgages."

She said many lenders were instead raising funds for mortgage lending using fixed-rate bonds, but rates on these can be as high as 4.75 per cent .

When the average cost of fixed-rate mortgages is compared with the average rate of a fixed-rate bond, lenders' margins fall to 1.51 per cent for a five-year mortgage, and to 1.63 per cent and 1.42 per cent for three and five-year deals respectively.

Ms Slade said: "If lenders truly want to tempt borrowers off record low standard variable rates, they need to reduce rates further and sacrifice margins.

"Mortgage approvals remain at record lows and it seems that only a bank base rate rise will kick-start the remortgage market."

Meanwhile, a report from the Bank of England, also released this week, suggested that mortgage rates may start rising again.

In its Trends in Lending report the Bank said some lenders had warned that a recent increase in their funding costs is starting to apply "upward pressure" to the rates they charge consumers.

But it added that this has yet to affect rates materially.