Page last updated at 23:00 GMT, Friday, 24 July 2009 00:00 UK

'Customers pay' as banks rebuild

By Brian Milligan
Business reporter, BBC News

Mortgage application form
The cost of fixed-rate mortgages has risen recently

Banks and building societies are trying to rebuild their profits at the expense of customers, according to Moneyfacts.

The price of borrowing has continued to rise significantly, even though the Bank of England's base rate has stayed at a record low, new figures show.

Mortgage rates have seen the sharpest rise. Three months ago, the price of a typical two-year fixed mortgage was 4.65%. Now it's 5.17%.

Interest rates on credit cards have also risen, though by a smaller amount.

The charges on cash loans have been steady since the start of the summer, although they are up by more than 2% since this time last year.

Rebuilding Profits

Most experts believe that banks are using the relatively low level of competition in the mortgage market to rebuild their profits.

Different interest rates

At the moment just eight or nine big lenders are supplying the vast majority of mortgages.

Michelle Slade, of the financial information website Moneyfacts, said lenders' potential profit margins were the largest they had seen since they started keeping records in 1988.

That is the difference between what it costs a bank to borrow the money itself and what it charges its customers to have a mortgage.

"Typically we would have seen a 0.8% margin on top of their product. Now we are seeing a 3.1% margin," said Ms Slade.

Justification

The banking industry has been quick to defend itself against the charge that it is using the situation to increase profits.

The Council for Mortgage Lenders (CML) pointed out that the risk of customers defaulting on mortgages was much higher than it was.

And even though the Bank of England's base rate is at just 0.5%, the reality was that banks were having to use savers' deposits to fund their lending, rather than borrowing on wholesale money markets. That meant their costs were much higher than they had been.

"The cost of raising funds is the main pressure that lenders face," said Sue Anderson, of the CML.

The same goes for other types of lending too, such as credit cards, or cash loans.

The British Bankers Association, which represents the wider activities of banks, said they were now required to hold much greater capital, as protection against losses. That made money for loans even more expensive.

However there is an admission that both banks and building societies are aiming for higher profits, if only to ensure the stability of the banking system as a whole.

"They need to get back to a level of profitability that makes the system sustainable without government support," said Ms Anderson.

"We're not there yet, but it would be unrealistic to assume that is not what we are aiming at."



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