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BBA explains how mortgage costs are calculated

28 Sep 2009

The economic indicators of the easy-credit era have less influence on the cost of high street mortgages today than they had in the past, the BBA explains in a factsheet published today.

Although mortgage rates for many customers are at an all-time low, the difference between these rates and other economic benchmarks - such as the Bank of England base rate and LIBOR - can be wider than they were between 2000 and 2007. The factsheet Your Mortgage and the Markets explains that it costs banks more to fund their activities today and that the old relationships with the benchmarks no longer apply.

The factsheet sets out some of the reasons why current mortgage rates do not follow closely the base rate and LIBOR, which include:

  • banks largely fund themselves using a mix of wholesale money and customer deposits. Savings rates for customers are a full two to three per cent higher than the Bank of England base rate, so deposits are therefore a costlier way to finance mortgages;
  • wholesale rates for the long term money required by banks for mortgages and loans is much higher than the LIBOR rates, which only cover short term borrowing;
  • the money raised by securitisations - the practice of converting mortgages into attractive investments for big investors - has all but dried up following the US subprime crisis; and
  • new regulations require banks to hold greater amounts of capital against the amounts they lend - money they cannot therefore use to fund mortgages.

BBA chief executive Angela Knight said:

"The recession has made it harder for all economic activity to take place. Many other lenders have simply exited these difficult markets, but the UK's high street banks continue to offer attractive rates on mortgages, as they do on savings, as competitively as they possibly can."

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Notes to Editors:

Your Mortgage and the Markets can be downloaded from the BBA website

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