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Banks Enjoying Record Profit Margins on UK Mortgages at Borrowers and Tax Payers Expense

Housing-Market / Mortgages Aug 19, 2010 - 11:23 AM GMT

By: Nadeem_Walayat

Housing-Market

Best Financial Markets Analysis ArticleBritain has been increasingly operating under an artificial tax payer supported banking system for the past 2 years that exists primarily to funnel tax payer cash onto the balance sheets of the bailed out bankrupt banks by means of capital injections, artificially low interest rates to generate unprecedented margins on loans against savings rates that persistently pay significantly below the rate of inflation and many other mechanisms such as Quantitative Easing which allows banks to borrow from the Bank of England at 0.5% and invest in longer dated government bonds at zero risk at 3.5%, thus generating a 3% risk free profit on tax payer cash.


The tax payer financed, retail customer squeezed banking system continues to see competition evaporate as illustrated by recent data from Moneyfacts illustrates which shows a huge increase in the margins on the rates banks borrow and lend to their customers up from 1.28% 2 years ago to 3.29% today, which translates into an average profit margin increase of £149 per month on an £150k mortgage.

 

Average Rate

Swap Rate

Margin

2 Year Fixed
4.55%
1.26%
3.29%
3 Year Fixed
5.13%
1.56%
3.57%
5 Year Fixed
5.48%
2.13%
3.35%
Source: Moneyfacts.co.uk 19.8.10

Michelle Slade, spokesperson for Moneyfacts.co.uk, commented:

“While the cost of swap rate funding stands at an all time low, the margin taken by lenders has hit an all time high.

“Mortgage rates are falling, but only a fraction of the reduced funding cost is being passed on as lenders continue to repair their balance sheets.

“Borrowers will be angered that they continue to pay the price for mistakes made by lenders, particularly those who have accepted government funding.

“Mortgage availability and the amount lent continues to improve, but the market still has a way to go before any reasonable normality is returned.

“Swap rates are the traditional barometer of fixed rate mortgages, but with lenders still nervous of entering the money markets many are opting for on balance sheet funding through their savings book.

“While the margin between fixed rate savings and mortgages is lower, it is steadily increasing again.

“The mortgage rates on offer at present are typical of what borrowers expected to pay when bank base rate was higher.

“Borrowers could see interest rates as high as 8% if bank base rate rises as quickly as it fell and lenders retain these record high margins.”

The consequences for the mortgage market is that record low interest rates are primarily for the benefit of the banks where the impact of record profit margins is equivalent to the base rate being at 2.5% rather than 0.5% as per the actual experience of mortgage borrowers.

The implications for the housing market is that of a lack of competition in the mortgage market that will continue to keep pressure on borrowers for a continuation of the trend for stagnating house prices, with increasing downward pressure when base rates start rise (which I will touch upon in a near future article), as banks will seek to continue to maintain their record profit margins by raising mortgage interest rates inline with base rate increases.

This analysis is part of an on going series that will culminate in a concluding multi-year UK house prices trend forecast by Mid September 2010 that will seek to more than replicate the original 2 year bear market forecast of August 2007 made right at the very peak of the UK housing market (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), which also builds up on the 100 page Inflation Mega-Trend Ebook of Jan 2010 (Free Download Now), which contained the following UK housing market analysis (updated graph):

UK Housing Bear Market Election Bounce

The UK housing market peaked in August 2007 and entered into a 2 year bear market exactly as forecast at the time (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), analysis which projected towards a fall in UK house prices from August 2007 to August 2009 of between 15% and 25% that has subsequently came to pass as UK house prices bottomed in March 2009 after having fallen by 23% from the 2007 peak.

The UK housing bear market has experienced a strong bounce off of the March 2009 lows and now stands up approx 10% off of the low as a consequence of unprecedented measures as mentioned in this ebook, the Labour government has succeeded in temporarily bringing UK house price falls to a halt and triggering an Election Bounce.

The impact of the inflation mega-trend on the UK housing market will be for UK house price to be supported in nominal terms, however this it does NOT ignite the feel good factor that triggers housing market booms which only follow when house prices begin to significantly rise in REAL terms i.e. after inflation.

UK house Prices Forecast 2007 to 2010

Whilst the current corrective bounce looks set continue into the middle of 2010 (allowing for a potential one month blip as a consequence of the bad January weather), this rally is still seen as a correction within a housing bear market that is expected to remain in a depression for many years, before house prices succumb to the effect of the inflation mega-trend and start to rise.

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Source: http://www.marketoracle.co.uk/Article22033.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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