UK mortgage lenders are they profiteering as interest rates stay low?

UK mortgage rates are falling, but lenders may not be passing on the reductions.Banks and building societies are imposing record profit margins on mortgages, despite falling house prices and lending levels, independent statisticians claim.

The record difference between average mortgage rates and institutional money market costs or ‘swap rates’ is said to add £149 a month to homebuyers’ bills on a £150,000 mortgage.

By contrast, the stock market does not seem to think banks are profiteering or have a licence to print money – as bank shareholders know to their cost.

The Council of Mortgage Lenders claims that homebuyers are benefiting from low interest rates.

The CML said gross mortgage lending reached a total of £13.6bn last month, a 5 per cent increase on £12.9 billion in June but down 3 per cent on £14bn in July 2009. It claims that the new data suggests lending remains on track to meet the CML’s revised forecast, published earlier this month, of £140bn for the year as a whole.

But fears of a double dip recession mean lenders are reluctant to advance new mortgages to many potential borrowers.

House prices are likely to continue to drift down while the stand off between fearful borrowers and lenders continues.

Most homebuyers will be able to sit out this period of stagnation in the housing market without too much trouble – unless unemployment and/or interest rates rise sharply.

While there is little or nothing most of us can do about either macroeconomic trend, homebuyers can insulate themselves against higher costs.

Brokers report a sharp increase in demand for fixed rate mortgages rather than variable rate loans. Fixed rate deals now account for 60 per cent of advances compared to 45 per cent at the start of the year.