There have been suggestions that mortgage lenders could be exploiting existing borrowers in a bid to increase profits as the effects of the economic downturn and low interest rates continues to bite. The Financial Conduct Authority’s (FCA) chief executive in the UK has highlighted a major concern facing the regulatory body in that lenders are increasing interest rates for existing home loan borrowers to generate higher income for the lending institutions.
Low interest rates for new borrowers is resulting in lenders seeking profits elsewhere.
During the recent economic downturn the profits of many mortgage lenders have been hit hard by the low interest rate environment. Millions of borrowers in the UK have long term tracker mortgages which have interest rates that are directly linked to the Bank of England Base rate. With the Base Rate at a record low of 0.5 per cent, where it has been since March 2009, lenders are making little profit from these millions of mortgages, while new business continues to be slow due to the stagnation of the property market.
But there is concern that some banks are exploiting existing customers who are not on fixed or tracker loans due to limited new business and the restrictions of tracker mortgages. Particularly customers who are either locked in to a loan agreement and those who are unable to shop around due to limited options or a change in circumstances.
According to the chief executive of the FCA they are particularly worried in the mortgage space that the low interest rate environment makes it a very difficult market to be profitable in.
With some banks’ business models under pressure there is also a risk that some businesses might seek to increase profitability by selling unsuitable products to their customers.
Several of the UK’s major lenders have increased their Standard Variable Rate even though the Bank of England Base Rate remains historically low with the consequence that monthly repayments have increased for millions of borrowers.
The Bank of Ireland have also significantly increased the rates of some tracker mortgages by using a condition in the small print of their loan agreements. High net worth mortgage borrowers with large home loans have seen the tracker differential on their loans more than double in the year to the end of 2013.
It seems that the Financial Conduct Authority’s chief has every reason to be concerned with lenders’ profit margins on new business currently so small that they are engaging in a competitive market for new business. Consequently, these lenders are looking for ways to drive up their profits through their existing mortgage customers.
Many mortgage experts believe that if the base rate continues to stay low in the UK then we can expect to see lenders increasingly using tactics to squeeze the most out of their existing borrowers. Anyone with a large mortgage on a standard variable rate should consider taking professional advice to seek alternative financing of their mortgage and provide greater certainty for their monthly payments.