Mortgage rates and fees rise to pay for recovery.

The state-backed banks are squeezing retail customers to help ease their path to recovery.

Royal Bank of Scotland, 84%-owned by the taxpayer, has been accused of leaning on mortgage customers through higher margins on lending, while Lloyds has boosted returns from current accounts with higher charges.

Announcing its annual results last week, RBS reported an overall loss of £3.6 billion compared with last year’s £22 billion loss. However, income from mortgages more than doubled to £1.2 billion from £500m, with RBS now claiming it had 12% of the UK retail market.

Figures from Moneyfacts, the financial data firm, reveal how RBS has widened its mortgage profit margins in the past year from 2.54 percentage points to 3.02 points — an additional £960 a year on a £200,000 home loan. The 0.48-point rise comes as wholesale interest rates — called two-year swap rates — fell from 2.56% to 1.55% during the year, while RBS only trimmed the cost of its two-year fixes from 5.1% to 4.57%.

In its results, the bank stated that “lending margins improved, particularly for mortgages” in the bank’s wealth division, which includes Coutts private bank.

RBS also pointed out that its results had benefited from “higher balances on standard variable rate (SVR) mortgages” — the rate borrowers revert to when their fixed-term contract ends. RBS’s SVR is at 4%, slightly lower than the average of 4.14%, but above Halifax, which charges 3.5%.

On Friday, Lloyds Banking Group, which is 41%-owned by the taxpayer, said it boosted income from current accounts by 53% to £1 billion last year. The bank reported a £6.3 billion loss overall. However, the windfall from current accounts came partly from raising costs for fee-charging accounts and unauthorised overdrafts. Last year, the High Court threw out the Office of Fair Trading’s case against bank charges.

Michelle Slade, at Moneyfacts, said: “It is particularly worrying that these banks are turning to retail customers now while interest rates are low and they are part-owned by the government.”

Last week, the Financial Ombudsman Service said that Lloyds was the most complained-about bank, with one of its brands — Bank of Scotland — accounting for the highest number of mortgage complaints.

We offer some advice on beating the squeeze:

Borrowers

In general, non-government banks are offering better deals than their state-backed counterparts. ING’s lifetime tracker at 2.89% has no penalty and a fee of £695 for those with a 25% deposit. While interest rates are forecast to rise, you could get a five-year fixed-rate deal from HSBC at 4.64% a year if you have a 40% deposit.

Current accounts

There are still accounts offering high interest on credit balances and low interest on overdrafts for no fee. You can earn up to 6% a year on balances of up to £2,500 from Alliance & Leicester’s Premier Direct Account, as long as you deposit at least £500 a month.

Shareholders

Bank investors waiting for a recovery were told to sit tight last week. RBS shareholders were rewarded with an 11.6% rise over the week to 37.7p after Stephen Hester, the chief executive, said bad debts had peaked last year. While Lloyds results revealed a slightly smaller loss than expected, its share price dropped 4.4% on Friday to 52Åp.

Graham Spooner, of The Share Centre, said: “Although the bank offers growth potential, Lloyds still remains high-risk and investors will have to remain patient.”

WARNING OVER C&G’S £30,000 MORTGAGE FEE

Cheltenham & Gloucester, part of Lloyds Banking Group, has come under fire for launching a mortgage with fees as high as £30,000.

C&G’s loan is a two-year tracker charging 1.99% a year for those with a 40% deposit and is available on loans up to £1m — meaning that some borrowers could pay £30,000. On a £200,000 loan, the 3% fee would be £6,000.

Aaron Strutt of Trinity Financial Group, a broker, said: “It beggars belief that they would launch this deal with a maximum loan size of £1m — C&G would be fully expecting to write business on this and it’s simply not in the borrower’s best interests.”

The fee can be included in the loan, although this would add £18,444 to the interest on a £1m loan over a 25-year term, according to L&C, another broker, and you still have to pay off the £30,000 fee. On a £200,000 mortgage, the fee would add £3,688 to the loan, plus you would have to pay the £6,000 as well.

C&G said: “The 1.99% deal is designed for a specific market — people who will find the lower payments useful in the early years. If customers want nil-fee products, we have those too.”

From The Sunday Times

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