In the ‘Interest’ of Banks: A Wake-Up Call for Mortgage Holders Amid Surging Rates
The Bank of England’s recent interest rate hikes, proposed as a means to manage inflation, are being scrutinized as potentially benefiting the nation’s major banks more than intended. Some argue that savers aren’t enjoying the advantages of these rate increases as much as they could, while borrowers are shouldering higher costs. This scenario has been proven to boost the profits of these financial institutions.
The financial landscape suggests that NatWest, a bank that needed taxpayer intervention during the financial crisis, is projected to garner almost £12 billion in net interest income this year. This sum, representing the difference between the interest paid to savers and charged to borrowers, is £2 billion more than the previous year. Lloyds Banking Group, a major player in the lending sector and owner of the Halifax brand, is also projected to yield almost £14 billion, which is almost £1 billion more than last year.
Further analysis reveals that the six largest lenders earned an impressive £44 billion in net interest income last year, marking an £8 billion increase from the year before. Predictions suggest that this year could witness an even larger profit margin as borrowing costs continue to rise, owing to anticipated interest rates peaking at over six per cent.
These financial developments coincide with growing concerns about the country’s inflation rate. The Bank of England has been striving to control inflation, but the current rate remains at a high 8.7 per cent. This significantly overshoots the Bank’s 2 per cent target, placing Prime Minister Rishi Sunak’s commitment to reduce inflation by half by the end of this year under scrutiny.
The Bank is preparing to raise rates again from the current 5 per cent next month. This decision could strain homeowners further, as almost a million of them could face an extra £500 a month in repayments as their less expensive fixed-rate agreements end.
On the other hand, interest rates on instant access savings accounts have risen modestly to 2.6 per cent from 0.5 per cent in the past year. During the same period, the average two-year fixed-rate mortgage has leapt to 6.8 per cent from 3.8 per cent. This growing divergence has inadvertently permitted banks to amass substantial profits.
Barclays, for instance, is believed to gain an additional £170 million for every quarter-point rise in the base rate, according to investment bank JP Morgan. This substantial profitability may provoke the government to consider imposing a windfall tax.
As these complex dynamics unfold, MPs and regulators are examining the banks’ earnings while recommending savers to explore better rates. Bank of England governor Andrew Bailey and Chancellor of the Exchequer Jeremy Hunt have both urged banks to reflect interest rate rises in the rates offered to savers and compete to offer better deals. However, the banks continue to defend their position, maintaining that their current margins of around 3 per cent have only just rebounded to pre-pandemic levels.
Even as this debate continues, banks are being called upon to guide customers towards better available products, a sentiment echoed by Harriett Baldwin, chairman of the House of Commons’ Treasury select committee. While there have been some improvements in savings rates, the banking sector still faces criticism over their practices, casting a spotlight on their approach to balancing profits with the needs of borrowers and savers.
