If the base rate is 0.5% Why is my mortgage 5.9%???

[garden man]

When the base rate came down to 0.5% my building society reduced the rate to 4.2% which although not enough,helped.Last year they increased it to 5.9%,when I asked why,I was told "market forces"!!! Would this be the market forces so recently in evidence called GREED? If you were to go into a shop with a mark up of 540% you would probably walk out without purchasing anything.Unfortunately i am unable to change my building society,even if i did the rates are still sky high.I thought the idea of reducing the bank rate was to put money back into the economy,not into the pockets of the banks & building societies,or am i just a naive gardener,trying to keep the roof over my head by doing what i love?

I feel what is needed is a peoples bank to fill the gap in the market which charges reasonable rates,no fees for handling our money & puts its' directors up front to keep in touch with its customers needs.

Any offers?

Nigel

[DJKillaQueen]

Yet if you had savings they'd link them to the base rate!

You make a very good point in that when most people start a business.... they care as much about the quality of the service they provide as the profit. They understand the realtionship between the two. The business grows, becomes successful until the multi-national knocks on the door and makes the kind of offer they'd be daft to refuse. The multi-national cares only about the bottom line of profit.

Multi-nationals have destroyed competition. We will never see a return to localised banking where the customer is king.

[Jeremy]

Were you on a 2 year tracker, which has expired and you're now on the standard variable rate? That's pretty standard, and it's a good way for banks to rip off customers who aren't financially savvy. Definitely time to shop around.

[Marmora Man]

Despite the Bank of England base rate being 0.5% the actual London Interbank offer rate (LIBOR) is higher. This is the rate at which banks lend among themselves. Today for a 15 year loan it's about 4% and for a longer loan it's about 4.25%.

So given your lender wants to make a profit and has other costs the difference between your rate of 5.9% and 4.25% represents the cost and profit element for your lender.

[????]

As jeremy said caught by a tracker or fixed rate deal.....

[HAL9000]

Marmora Man Wrote:

-------------------------------------------------------

> So given your lender wants to make a profit and

> has other costs the difference between your rate

> of 5.9% and 4.25% represents the cost and profit

> element for your lender.

When one factors in the leverage the lender obtains through the practice of Fractional Reserve Banking, the bank's profit margin works out considerably more than the 1.65% the above calculation suggests - add in the compounding of interest over the term of the loan and one begins to understand why mortgage lending is so profitable.

All one needs is a layer or two of securitisation to transform future value into discounted present value and bingo: it's the perfect recipe for a financial crisis!

[Mick Mac]

Marmora Man Wrote:

-------------------------------------------------------

>

> So given your lender wants to make a profit and

> has other costs the difference between your rate

> of 5.9% and 4.25% represents the cost and profit

> element for your lender.

Its also relevant that the banks have lots of people who took out lifetime trackers at a fraction over the Bank of England base rate 4 or 5 years ago, who are currently paying about 1%, or less. The banks are making a significant loss on the loans to these customers which it has to make up elsewhere.

[HAL9000]

You don't think mortgage lenders hedge their exposure to interest rate volatility?

[Mick Mac]

Yes - But I don't think they expected to be charging some customers 0.75% for quite so long, especially as these loans were perhaps 5.75% when taken out. There is no hedge that will have ironed that out. The money needs to be made up elsewhere.

[????]

Agreed, try telling someone back in 2007 to hedge against interest base rates falling to 0.5% even 2% and you'd have been laughed at as a madman. These aren't normal times, there's no way the risk assessors would have said "let's hedge incase interest rtaes fall to an unprecedented low of 0.5"

[Mick Mac]

Can't you just say "What Mick said"...

3 years on the forum and still waiting for my first one.....:)

[DaveR]

Plus, lenders are now pricing risk a bit more sensibly than before, which can only be a good thing for the economy as a whole, even if in practice it means more expensive credit for most people.

[Jeremy]

Good point DaveR. The ratings agencies have been slammed because their ratings on mortage backed securities turned out to be wildly optimistic... this surely had a big part to play in the financial crisis. The increase in credit spreads reflects a more realistic assesment of the risk.

Not much comfort to garden man, though.

[HAL9000]

???? Wrote:

-------------------------------------------------------

> you'd have been laughed at as a madman.

That isn't how hedge strategies work though ? no risk-adverse asset manager would attempt to predict interest rate changes. For some two decades a technique known as Asset Liability Management has become the industry standard amongst lenders. Interrelated hedge strategies are used to lock-in differentials regardless of which way and by how much interest rates vary: See Interest Rate Risks and Interest Rate Swaps.

[Mick Mac]

So Hal. Cant be bothered to read the links and prob would be too complex for me. But are you telling me that all the loans lent at 0.25 above base when the rate was 5% for 25 years - are profitable when the rate is now 0.5%?

[HAL9000]

MM - you opined: The banks (i.e. mortgage lenders) are making a significant loss on the loans to these customers which it has to make up elsewhere.

I don't think that is the case - mortgage lenders hedge their exposure to interest rate volatility for the short time the loans are on their books, usually a matter of weeks or months at most. Thereafter, multi-million pound tranches of mortgage loans are 'sliced and diced' into bond-like derivatives that are sold to third parties. Any subsequent losses or profits accrew to the buyers of those mortgage-backed securities - not the original lenders.

[????]

.

[Mick Mac]

Excellent post Quids - what did it really say?

[red devil]

''What Mick said''...

[SteveT]

Possibly because the banks who borrowed from the gulf at 15% per annum need a little help with the repayments.

[Cat in a Hot Tin Bus]

Same basic question - however why are Credit Card interest rates at an all time high ?(6)

[Jeremy]

Same basic answer - risk of not getting repaid

[HAL9000]

As long as customers are prepared to pay exorbitant rates the credit card companies will continue to charge them.

I gave up using credit cards nearly thirty years ago - I came to the conclusion that they were a thinly disguised scam.

I'm amazed that so many customers and merchants are still willing to be skimmed every time anyone buys anything - and those hole-in-the-wall cash withdrawal charges are just madness.

Debit and cash cards provide the same convenience yet cost virtually nothing.

[HAL9000]

Panorama BBC1 8:30pm tonight (19 July 2010).

"Reporter Adam Shaw investigates the state of Britain's banks, and reveals that while base rates remain low, the cost of borrowing has risen significantly."

[Loz]

HAL9000 Wrote:

-------------------------------------------------------

> As long as customers are prepared to pay

> exorbitant rates the credit card companies will

> continue to charge them.

>

> I gave up using credit cards nearly thirty years

> ago - I came to the conclusion that they were a

> thinly disguised scam.

>

> I'm amazed that so many customers and merchants

> are still willing to be skimmed every time anyone

> buys anything - and those hole-in-the-wall cash

> withdrawal charges are just madness.

>

> Debit and cash cards provide the same convenience

> yet cost virtually nothing.

Used properly, credit cards offer a lot of advantages - free credit, extra consumer protection, etc. For instance - paying for something in another country with my Nationwide credit card not only costs me nothing, but the exchange rate is better than anything you'll get anywhere. Big plus. Saves me loads of wonga.

Like a lot of things, banks rely on people misusing them. Get one with an interest free period and pay it by direct debit and you get all the advantages and little to nothing in the way of disadvantages.

And yes, anyone who gets money from an ATM with a CC needs their head read. Mind you ditto with those private cash machines that charge ?1.50 for debit cards as well. People make a lot of money out of other people's laziness and stupidity.