There is an interesting report which has been published by the BBA trying to educate borrowers on the cost of mortgage funding. It argues that the cost of funding for mortgages isn't linked to LIBOR it is linked to the savings rates being paid by banks. I do understand that the relationship between LIBOR and mortgage rates isn't as clear cut as it was before. Indeed the misery of the collapse of Lehmans has damaged the idea that banks can always borrow at 3-month LIBOR, lend it out for 25 years and simply roll it over each time it comes up for renewal. Borrowing short and lending long, isn't the money printing process it used to be. However LBG's securitization last week showed the market that there are investors out there but they want a decent return (almost 2%) over LIBOR. LBG have also given a put obligation at year 5 so that note holders can demand repayment from Lloyds at that time. I guess the mortgages included in the securitization are at mega low LTVs.
The report from the BBA points out that the majority of mortgage lending is being funded by savers rather than from wholesale funding. Up until this point the report seems to make sense but the contentious bit in my humble opinion is that apparently banks are paying savers 2-3% over the base rate for savings and that's why mortgages are so expensive. Whilst if you look at the savings best buys there are rates that start with a 3 for instant access accounts but I am sure if you look at the current rates being paid to savers, then these are substantially lower, indeed many savers aren't getting any interest at all. Most savers don't churn their account every couple of months to find a better rate. The best rates are only available on newer accounts; all of the older historic accounts are getting next to nothing. Banks seem to phase out accounts, shut them to new depositors and then reduce the interest rates paid on them over a period in time.
I would love to know what the average rate being paid for our nation's savings book; I am sure less than 2% and probably less than 1%. It would also be fascinating to know what percentage of the savings book actually churns. Whilst saying banks are paying 2-3% over base for savings isn't incorrect, it is only going to be for a very small proportion of the total savings book.
Here is the address of the report. http://www.bba.org.uk/content/1/c6/01/66/09/Cost_of_Funds_BankFact_-_FINAL.pdf
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