Page last updated at 14:59 GMT, Saturday, 25 July 2009 15:59 UK

Banking costs 'put up mortgages'

An estate agent's window in London
Demand exists for mortgages, the British Bankers Association says

The British Bankers Association has defended the rise in the cost of borrowing - despite the base rate remaining at a record low.

Financial website Moneyfacts claimed mortgage profits had increased nearly fourfold in recent months, with typical fixed-rate deals also going up.

But banks are facing "substantially" higher costs, the association's chief executive, Angela Knight, insisted.

And they had been "instructed" to put far more money in reserve, she said.

In the UK, banks were "holding twice the amount of the worldwide average", Ms Knight added.

"You can't hold it and lend it at the same time."

'Far less' cash

Moneyfacts described lenders' potential profit margins as being the largest it had seen since it began keeping records in 1988.

For a bank, the margin is the difference between the cost of borrowing money and the amount it charges people to have a mortgage.

Different interest rates

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

She also claimed a typical two-year mortgage deal now cost 5.17%, up from 4.65% three months ago. The Bank of England's base rate is 0.5%.

But Ms Knight said banks had less money available to them as the wholesale supply of cash was "far less" than in recent months.

And referring to one of the biggest sources of income to banks, she added: "You only need to look at savings rates. They typically pay out 3%.

"If you are paying 3% for your money, and factor in some for expenses and margin, you can see how you quickly arrive at lending rates of 5%."

She accused Moneyfacts of making its claims without having "taken all these things into account".

'Mortgage demand exists'

At present about eight or nine major lenders are supplying most mortgages in the UK.

Most experts believe that banks are using the relatively low level of competition in the mortgage market to rebuild their profits, BBC business reporter Brian Milligan said.

Angela Knight
More borrowers were likely to default in a recession, Angela Knight said

But the Council for Mortgage Lenders insisted the risk of customers defaulting on mortgages was much higher now than before the recession.

And it was "also worth noting that the only people lending are banks", Ms Knight added.

"Building societies can't do it due to their business model and they can't get access to funds as easily."

It was also clear that many borrowers were becoming "stuck in chains" when trying to buy somewhere to live, she said, meaning banks were "granting more mortgages than are being taken up".

"There's demand out there," Ms Knight added.

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