Mortgage domino effect fear as banks face ratings review

By JEFF SALWAY
Published on 23/06/2012 14:27

Homeowners have been warned they could face a fresh rise in mortgage costs after some of the UK’s biggest lenders suffered a credit rating downgrade.

Royal Bank of Scotland, Barclays, HSBC and Lloyds Group (owner of Bank of Scotland and Halifax) are among 15 banks worldwide to have their credit rating lowered by ratings agency Moody’s.

The banks have “significant exposure to volatility and risk of outsized losses”, according to Moody’s, which said some could go down another notch over the next 12 months.

The downgrades are likely to make it more expensive for those banks to borrow as they will be seen by other institutions as riskier to lend to. That increase in costs could be passed onto customers.

Mortgage borrowers will be most affected if their bank finds it harder to borrow money, while repayment rates may also be raised on other forms of lending.

Andrew Hagger, head of communications at Moneyfacts, said: “The downgrades will mean the banks will face higher borrowing costs, which may in turn end up in the customer’s lap in the form of more expensive mortgages, loans and overdrafts.”

Richard Lloyd, executive director at consumer group Which?, also warned of a further rise in mortgage rates following the Moody’s announcement.

“For too long banks have taken advantage of the lack of competition on the high street to increase interest rates charged on mortgages, loans and overdrafts, with over one million consumers seeing yearly mortgage payments increase by over £300 million with the standard variable rate (SVR) rises earlier this year.”

Clydesdale Bank, Halifax, RBS and Bank of Ireland are among several lenders to have hiked SVRs recently. Borrowers have also been hit by a record rise in mortgage fees over the last year, as revealed on page three of Smart Money today.

One possible saving grace is that UK banks were last week given access to more than £100 billion of cheap funding by the government and the Bank of England, although Which? called for “strong safeguards” to ensure the cheap credit is passed onto consumers.

The government also published a banking white paper last week outlining changes for which consumers could ultimately pay. Customers will soon be given more protection against bank failure under plans to ring-fence high street banking from investment banking operations, while banks will also be expected to hold greater capital reserves.

But this could come with a sting in the tail in the form of higher costs for borrowers and less attractive rates for savers, said Kevin Mountford, head of banking at moneysupermarket.com.

“Under the new rules, banks will be expected to hold a minimum of 17 per cent capital as protection against losses and the burden of raising these funds will most likely fall on ordinary customers.”

Borrowers will be most affected if banks pass on higher borrowing costs, but Lloyd said the downgrade acted as a reminder to savers of the importance of protecting their money.

“People should spread their money across different banks and make sure their cash is in an account covered by the UK compensation scheme, which guarantees savings up to £85,000 per person, per financial institution.”

He called on the government to boost confidence in banks by changing the protection to cover individual brands rather than institutions: “With the many bank mergers and takeovers of recent years it is unrealistic to expect consumers always to be aware of who owns their bank and whether their money is fully protected.”