Lenders not able to cut price of borrowing
In its quarterly bulletin, the Bank said that interest rates on some loans have actually risen whilst base rates have fallen. But this is to do with the cost to the lender of borrowing the money and needing bigger financial reserves.
The Council of Mortgage Lenders has welcomed the analysis of the influences on the pricing of new lending. It believes the article clearly makes the point that the factors influencing pricing are many and complex – a point that the CML has been making consistently.
The Bank’s analysis explains that, while margins may indeed be higher on new business than they used to be in the past, there are valid reasons for this. Indeed, the Bank says that: “Lenders are seeking to rebuild net interest margins…in part through a higher mark-up on new lending. This is consistent with lenders rebuilding capital through retained earnings, an important part of the ongoing adjustment process for the UK banking sector and a factor that should ultimately lead to lower funding costs.”
The analysis explains that new pricing reflects the need for lenders to take account of the low net interest margin caused by the ongoing low interest rate environment. With many existing mortgages on very low rates, and with new funding costs unable to match these, the other factors exerting pressure for higher pricing – such as higher funding costs and higher credit risk costs – are exacerbated.
CML chief economist Bob Pannell commented: “The Bank sets out a clear explanation of the influences on the pricing of new lending.
“Two particularly striking observations leap out. First, the pricing of new secured lending is emphatically downwards, compared with the price of new unsecured lending which is emphatically upwards. Second, the fact that lenders are seeking higher returns on new business is a logical response – even a desirable one – that should help lenders rebuild capital, improve investors’ perceptions, and ultimately bear down on funding costs over time.”