Banks accused of 'mortgage rip-off' as they raise rates
Banks have been accused of exploiting homebuyers by making the highest profits on mortgages for more than 20 years.
Despite the Bank of England's rate being maintained at an historic low of just 0.5 per cent, borrowers can expect to pay up to 8 per cent on some fixed rates, with many lenders increasing interest on deals even as their own costs fall.
Politicians and mortgage experts condemned the rises at a time when 1,000 families a week are being evicted from their homes, saying banks were "stoking up problems for the future" amid predictions of a rise in repossessions.
Vince Cable, Treasury spokesman for the Liberal Democrats, said: "What is worrying is how it is affecting existing borrowers, because at the moment repossessions are being held back by the forbearance of lenders and the various Government measures in place.
"But the banks are stoking up enormous problems for the future and the dam is going to burst. More and more families are not going to be able to afford these high rates and it is a timebomb that will go off sometime next year when the banks close in on them.
"The banks are pushing the market to the limit but they are storing up big problems for the future."
Some of the biggest rises in rates are among fixed deals, which latest figures show is the choice of three quarters of all borrowers, as they try to guard against future rises.
Would-be homeowners are also being hit by the rising cost of arranging a home loan, the average cost of which has jumped to more than £1,000.
And among the worse offenders are some of the banks which have received billions of pounds in Government funding.
Amid a rise in mortgage application fraud, divided opinion on the future of house prices, and predictions of failure for the Alistair Darling's plans to revitalise the market, politicians and financial analysts called on the Government to intervene and help restore confidence in one of the worst slumps the country has ever seen.
Shadow Chief Secretary Philip Hammond said: "The Government's policies to re-start lending are failing to help hard-pressed homeowners.
"And with Government borrowing at record levels, there is a risk of long term interest rates being forced up still further with a knock on effect on mortgage rates."
On Friday nationalised bank Northern Rock increased the cost of its five-year deal by 0.6 per cent to 6.29 per cent.
Lloyds TSB, part of Lloyds Banking Group which is 47 per cent owned by the taxpayer, charges 7.89 per cent for a five-year fixed-rate for those with a 10 per cent deposit.
However, swap rates – the level which lenders use to price their fixed rate deals – have continued to fall from their recent peak of 2.51 per cent on June 11 to just 2.05 per cent, according to personal finance website Moneyfacts.co.uk
Royal Bank of Scotland, which is 70 per cent owned by the taxpayer, has increased some of its five year fixed rates by 0.6 per cent to 5.59 per cent.
The average two-year fixed rate mortgage is now 5.16 per cent. It means lenders are benefiting from a margin of 3.11 per cent, the largest since Moneyfacts began collecting the data in 1988.
Michelle Slade, a spokesman at Moneyfacts.co.uk, said: "Lenders historically took around a 0.8 per cent margin for risk on fixed rates, but since the credit crisis has hit this margin has increased dramatically.
"While some of this rise can be attributed to the increased risk of customers defaulting, it appears that many lenders may now be being over cautious.
"It is highly likely that the default rate will not be as high as the lenders are factoring in, resulting in lenders making increased revenue out of borrowers. It is a mortgage rip-off."
Lenders defended the increases saying rates took into account the risk involved of lending high loan-to-values amid falling house prices.
RBS said it "regularly reviewed" its rates in line with competitors, while Lloyds TSB said it was one of the few lenders actively competing in the higher loan-to-value market.
In further bad news for the market, the Communities and Local Government Select Committee called on the Government to take further steps to boost lending after saying the Treasury's Asset-backed Guarantee Scheme is not working.
The scheme provides guarantees on lender's mortgage-backed securities, enabling them to sell on mortgages to investors, raising new money to lend to consumers.
Dr Phyllis Starkey, chair of the Committee, called for new measures to get the mortgage markets moving, and said: "In its current form the Asset-backed Guarantee Scheme is a leap that reaches across only half the chasm: impressive, but doomed to fail."
It comes as a leading accountant suggested a 30 per cent chance house prices would be below existing levels in 2020.
PricewaterhouseCoopers blamed falling houses prices on subdued mortgage lending and house sales, combined with rising unemployment.
However, estate agents reported that prices are expected to increase amid a shortage of properties and a record number of buyer enquiries.
But tight mortgage lending is causing problems for borrowers and has led to a rise in mortgage application fraud, according to the Council of Mortgage Lenders.
It said borrowers are trying to get around the tight criteria by entering false details such as inflated salaries.
A Communities and Local Government spokesman said: "We continue to do all we can to help the housing market."
The Treasury was unavailable for comment.
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