slashing their rates to record lows, particularly for borrowers with large deposits. A couple of months ago, Nationwide became the first lender in the history of Britain to offer a sub-1 per cent mortgage deal for a fixed period of five-years, while Halifax followed suit just a few weeks later. Meanwhile, HSBC UK also launched a two-year fixed-rate mortgage deal at 0.94 per cent not long ago, a rate which was described as the bank’s lowest rate ever.
Nevertheless, according to the BoE, the gap between the interest rates and origination fees offered by mortgage lenders began to widen nearly a decade ago. Back in 2012, the Funding for Lending Scheme (FLS) was launched by the Central Bank, with the aim of encouraging banks and other financial service providers to expand their lending to households at cheaper rates. The move boosted UK by more than 30 per cent, according to the BoE, as low interest rates were offered with higher origination fees. An analysis conducted by the apex bank found that a deal with a £1,000 higher origination fee would be offered at a 27 basis points lower interest rate. Conversely, a deal with no fee is usually offered with a 33 basis points higher interest rates in comparison to a similar deal with fees.
“In such a counterfactual scenario with zero origination fees, lenders charge higher interest rates to offset the drop in profits due to the ban on fees,” the central bank noted. “Naturally, lenders’ profits decline but consumer surplus also decreases, indicating that they benefit from this market segmentation and price discrimination increases surplus.”
Accordingly, the BoE concluded that while origination fees enable lenders to price discriminate and capture surplus, however, on the other hand, banning fees altogether curtailed borrower surplus and aggregate welfare.
