The difference between the Bank of Englands base interest rate and the cost of tracker mortgages has soared five-fold figures have revealed. And mortgage arrangement fees have also gone through the roof.
In previous years, mortgage lenders were charging new customers around 0.3 per cent over base rate at that time. But now the cheapest trackers are 2.99 per cent above base.
Most lenders have not been promptly passing on reductions in interest rates to new tracker customers but the Government has had harsh words with the banks and building societies in an attempt to remedy that situation.
At the same time, arrangement fees for the deals have also soared from an average of 239 pounds previously to over 1,000 pounds now.
The problem for the mortgage lenders is that, whilst the official interest rates have fallen, this has not been reflected in wholesale funding costs. And it is the wholesale money markets which fundamentally provide the funds flowing into the housing market through mortgages.
One of the key inter-bank lending rates, three-month Libor, currently stands at 1.50 per cent and it is this, rather than base rate, upon which many tracker deals are based.
Eighteen months ago, Libor was marginally above 5.5 per cent - broadly in line with bank rate. It then climbed higher as the impact of the credit crunch became apparent. It then peaked at 6 per cent, despite the bank rate falling to 5 per cent, and then drifted down throughout the summer to a low of 5.7 per cent
Since then only a fraction of the cuts in bank rate filtered through to Libor - for a time it stabilised a little above 2 per cent having been around 2.16 per cent. For now, Libor appears to have stabilised around 1.50 per cent above base rate.
This situation has developed because banks have become reluctant to lend to each other. But it is the Governments initiatives in the money markets, including the part-nationalisation of three of the UK's banks announced, that has started to get money markets moving again, although so far inter-bank lending rates have been slow to respond.
It is true that in the past a tracker mortgage meant you would pay base rate or a rate very close to it. But now we are increasingly seeing major lenders charge a significant premium for what has become, in a period of falling interest rates, a very popular type of product.
It seems that for confidence to return to the mortgage market tracker rates have got to more closely reflect the Bank of England base rate. Otherwise it looks like the banks and building societies are simply improving their margins and not helping their customers.
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