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Funding pressure building towards higher mortgage rates

[ Posted May 27th, 2012 ]

Banks that rely on the wholesale markets for their funding are the most likely to increase their mortgage rates and reduce the amount of lending that they actually make available to potential lenders if the economic turmoil within the eurozone continues to grow.  The turmoil is actually altering the state of new debt and is making the financial situation in all European countries a bit shakier than it has been in the past several years.  In the wake of the 2008 market collapse and the fragile market that ensued, the EU crisis may simply prove to be too much.

After the financial meltdown many of the high street banks in the UK focused on strengthening their funding positions by choose to reduce how much they borrow from the wholesale markets and instead focused on receiving large savings deposits to back lending from their customers.  Despite this shift in practice, a few of the larger high street banks still lend out more annually than they receive in deposits making them the most likely to be forced to increase their best mortgage rates since they are still dependent also on the wholesale markets for lending purposes and will need to pay higher for funding.

A quick look over the high street lenders reveals that Santander and Lloyds Banking Group are the most dependent on the wholesale market with their loan to deposit rates coming in at about 138% and 130% respectively.  On the other hand, other high street lenders such as the RBS and Yorkshire Building Society are in much better shape with almost perfect loan to deposit ratios that sit at 105% and 102% respectively.  This means that the latter are less likely to feel the effects of the wholesale funding pressures since they only rely on the market for a small percentage of loan funds, making them the best candidates for the best mortgage rates.

Already Santander and Lloyds Banking Group have announced that they will reduce the amount of new mortgage lending that they will approve as they look to even up their numbers.  Mark Harris, a mortgage broker from SPF Private Clients, stated that the eurozone crisis is going to continue to affect some of the largest high street banks and is going to force them to reduce their lending practices in an effort to stabilize their fragile positions and avoid a banking meltdown similar to a few years ago.

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