Lender competition will continue
Rob Clifford is group commercial director at Shepherd Direct which is a shareholder at CENTURY 21 UK, Moneyquest and Stonebridge.
A headline that recently caught my attention was along the lines of, ‘Carney kicks base rate rise into the long grass’. Given the utterances of the Bank of England Governor over the past year or so, and the ‘forward guidance’ we were all promised, I can’t help but feel slightly bemused by this latest crystal ball gazing on when base rate may or may not move.
Let’s remind ourselves that just last summer the Governor, and most of his fellow MPC members, were suggesting a rate rise was a racing certainty by the end of 2015. Given that didn’t happened, we now have a scenario in early 2016 when bank base rate movements are deemed to be a ‘long way away’. My own view is that the all-important first rate rise will be in 2016, although most pundits are of the opinion that we are at least six months away from any such increase.
Of course in terms of consumer demand for mortgages, and indeed product pricing, the BBR has muted impact on what happens unless we’re talking about BBR tracker rates. Most lenders are significantly funded by the wholesale markets and if we were examining the way the mortgage pricing wind was blowing, we would see a breeze blowing in the direction of downward repricing. Three-month LIBOR is down to 0.59%, while two, three, five and 10-year money is still incredibly low and falling.
Which leaves lenders in a position to cut further not just at the lower LTV levels it would seem but higher up the credit curve too. It’s likely to be one of the drivers behind why HSBC recently launched a stunning sub-2% 5-year deal and it’s why the best 2-year 60% LTV tracker rates are hovering just above 1%, with 2-year fixes not a great deal higher. Perhaps, given this, it is not surprising that lenders have hit the ground running since the start of the new year with many committed in terms of keen pricing. We are in a highly competitive environment which is not about to peter out anytime soon.
The mainstream market will be an interesting sector to analyse as we motor through 2016. With some suggesting we could go another 12 months without any BBR movement, what effect might this have on consumer sentiment and mortgage product choice, and how can advisers embrace this in order to secure the best deals for clients?
Certainly, lender competition looks likely to remain strong. According to the most recent CML gross lending figures, the annual figure for 2015 is likely to be in the region of £214bn – up on the trade body’s own revised estimate of £209bn. Predictions by many commentators (including myself) for 2016 suggest a further 10%-11% uplift on this gross lending figure can be achieved, although the CML itself prefers to say increases will be ‘slow and steady’ over the next two years.
One thing appears certain and that is we will remain on an upward trajectory leaving more and more lenders wanting (and needing) market share. There was, without doubt, a hope from some lending quarters that a ‘guaranteed’ BBR increase in 2016 would stimulate remortgaging activity and returns, which would in itself increase the amount of gross lending requirements to mitigate lender outflow. Given Carney’s recent statements, significant remortgage resurgence might be one for 2017 rather than this year.
However, if a BBR-inspired remortgage push doesn’t materialise naturally, then the lenders might contrive to deliver it. This would mean rates continuing to be driven downwards undoubtedly benefiting consumers. I fully expect the intermediary market to also be a major beneficiary from this, however there remains a risk that some lenders will dust off dual-pricing strategies in order to win both more direct lending as well as that from their intermediary partners. Nonetheless the intermediary market will remain the distribution channel of choice, especially for new entrants, and is certain to grow its dominance. Consumers and lenders alike need the broker model to prosper.
For a large number of lenders, particularly in the mainstream space, the price-driven competition will be simply too much to contend with. There may be the temptation to compete on price with the likes of LBG and Santander but will it be a challenge that most lenders, especially the smaller societies, are willing to take up? I suspect not. Many will not have the balance sheet strength to chase rate so may well look much more closely at ‘specialist lending’ and other niches which deliver the necessary margin.
We’re already seeing this, with the likes of Mansfield Building Society launching very useful products for niches like its recent ‘future valuations’ mortgage for those borrowers who want to fund property improvement; we have also had the Ipswich with its cheery ‘divorce mortgage’ for those who may previously have been left scuppered by tighter affordability validation.
Throughout the year, we can expect more of this type of ‘precision lending’ from the smaller societies, which should mean both competitive pricing for the mainstream and greater home finance accessibility for more complex borrowers. By those measures, the 2016 mortgage market should build nicely on what has gone before.