Bank publishes helpful analysis of mortgage pricing

The CML welcomed the recent publication by the Bank of England of its analysis of influences on the pricing of new lending.

Related topics:  Mortgages
Millie Dyson
23rd September 2010
Mortgages
The Council of Mortgage Lenders report:

In contrast to some of the media coverage of this issue, the Bank’s article makes it clear that there is a complex relationship between the many factors influencing pricing – a point we have been making consistently.

The Bank concludes that margins may indeed be higher on new business than they were in the past. But it argues that there are valid reasons for this. Acknowledging that lenders are seeking to re-build net interest margins in part through a higher mark-up on new lending, the Bank concludes:

“This is consistent with lenders building capital through retained earnings, an important part of the ongoing adjustment process for the banking sector and a factor that should ultimately lead to lower funding costs.”

The Bank explains that new pricing reflects the need for lenders to take account of the low net interest margin caused by the ongoing low interest rate environment. Many existing mortgages are on low rates, which cannot be matched by new funding costs. So, other factors exerting pressure for higher pricing, such as higher costs of funding and credit risk, are exacerbated.

As well as setting out a clear explanation of what influences the pricing of new funding, the Bank makes two striking observations. The first is that the pricing of new secured lending has moved downwards since the onset of the financial crisis and lower official rates, while unsecured lending has become more noticeably expensive.

The second is that it is logical – and even desirable – for lenders to respond to market conditions by seeking higher returns on new business. This will help lenders re-build capital, improve investors’ perceptions and ultimately bear down on funding costs over time.
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