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Mortgage rates ‘far too high’ despite borrowing costs falling

Houses - Anadolu Agency via Getty Images
Houses - Anadolu Agency via Getty Images

Homeowners are paying thousands of pounds extra on their mortgages according to analysis that suggests some of Britain's biggest lenders are charging rates that are "far too high".

Natwest, Barclays, Lloyds Banking Group and HSBC are offering fixed rate deals that are around 50pc more expensive than three months ago on mortgages reviewed by the Telegraph, even though wholesale borrowing costs have fallen dramatically since the highs triggered by the market chaos following the mini-Budget.

Fixed rate deals across the industry are currently priced well above current Bank of England interest rate predictions, pushing up the gap between what high street lenders and consumers pay for credit.

The biggest banks are among those offering the highest rates, with some lenders even forcing borrowers with large deposits to fork out a significant premium if they want to lock in a deal.

NatWest currently offers first time buyers with a 40pc deposit a two-year fixed rate of 6.12pc with no arrangement fee, compared with 3.69pc at the start of September for the equivalent mortgage, according to Moneyfacts.

Lloyds, which owns Halifax, the UK's biggest provider, is offering a 60pc loan-to-value (LTV) mortgage that has jumped from 3.91pc to 6.39pc for first time buyers fixing for two years on the equivalent deal.

This means someone borrowing £120,000 over 25 years faces payments that are £2,000 a year higher than before the Tory leadership in early September, even though borrowing costs have fallen back.

Kwasi Kwarteng - Carl Court/Getty Images
Kwasi Kwarteng - Carl Court/Getty Images

The interest rate on an equivalent mortgage deal at Barclays has climbed from 3.64pc to 5.75pc, while HSBC is offering a rate that has climbed from 4.28pc to 5.74pc.

The former Chancellor Kwasi Kwarteng sparked a surge in borrowing costs after announcing a £45bn package of unfunded tax cuts.

But interest rate swaps - which factor in predictions for future borrowing costs and are used to price fixed-rate mortgages - have dropped dramatically since his successor Jeremy Hunt reversed the bulk of those plans.

Two-year swap rates climbed from 3.95pc at the start of September to a peak of almost 5.5pc in the aftermath of the mini-Budget, but are now back at 4.34pc today.

However, the average rate on a two-year fixed rate mortgage has climbed from 4.24pc on September 1 to 6.12pc today, and from 4.33pc to 5.92pc for the average five-year fixed mortgage.

Peter Richardson, an analyst at Berenberg bank, said: “These rates remain far too high.”

Mr Richardson said even the best deals on the market did not reflect current funding costs, saying that a five-year fix at 5pc is 1.2 percentage points higher than the interest rate swap level. Normally, he said, the difference would be between 0.8 and 1 points.

Uncertainty over the future path of interest rates is likely to keep fixed mortgages higher than historical averages in the short term, Mr Richardson said.

Families who want more certainty over their mortgage payments should wait to fix their deal, he suggested, adding that rates are likely to drop towards 4.5pc by mid-2023.

Mr Richardson said: "The uncertainty around where rates end up is making everyone nervous. High street banks don't want to end up shouldering lots of losses that could impact the wider economy."

Thousands of borrowers have switched to much cheaper variable rate deals to save money on monthly payments in the short term.

However, they face higher payments in the New Year if the Bank of England keeps raising interest rates from their current level of 3pc to the 4.5pc peak expected by markets.

Andrew Bailey, the Bank’s governor, recently told MPs that he “would expect” fixed mortgage rates to fall further, including for buyers with smaller deposits. “Quite when it happens is a decision for lenders, because they have their own pricing arrangements,” he said.

All of the high street banks, including NatWest, said their fixed rate deals had fallen sharply in recent weeks and remained under continual review.

A spokesman for Lloyds Banking Group said: "Swap rates underpin fixed mortgage pricing, but they are not the only factor.
"That's why there is not always a direct correlation between timing of their movement and mortgage prices, as we saw when rates started to increase earlier this year."

A spokesman for HSBC said the bank offers "good value in the current climate". Barclays said the bank had to balance customer demand and "external market conditions".

Rachel Springall, a finance expert at Moneyfacts, said: "Borrowers may well breathe a sigh of relief to see that fixed mortgage rates are starting to fall, but there may be much more room for improvement.

"Fixed mortgage rates could be set to fall further still, but there is no clear answer as to how quickly that may be."