Most UK banks and mortgage societies are losing their profit margins quickly due to the tight competition and the fall of the housing market. This leads the companies to lower their lending standards, as well as cutting some mortgage fees, in order to encourage the public to apply for a mortgage.
The Decline
According to Moneyfacts comparative study, the number of banks willing to lend for mortgage deals increased up to 5% at 1,123 for the past six months alone. These banks also claim they're willing to lend at least 90% of the property's value to entice the potential investors and applicants to avail of a mortgage. Earlier this month, the HSBC's M&S bank also increased their LTV (loan to value) by 95% on three of its loan mortgages products. They've also extended the payments' term up to 35 years.
Last July, CYBG also introduced a 95% LTV mortgage with a higher limit set depending on the borrower's income.
Other lending institutions have also taken measures like increasing their maximum loan sizes, reducing rates on LTV loans, and cutting some arrangement fees to maintain their profit growth. These show that most UK banks are now exerting tremendous effort to keep winning new businesses and leads without having to cut their profit margins further.
The Tight Competition
The mortgage experts claim the reason behind these efforts is because of the tight competition. Since the year 2018 started, the mortgage rates reached near historic lows while the funding cost increased. The recent rise of independent mortgage brokers gave the borrowers a wider access and range of options to apply for mortgages. Not to mention most independent mortgage brokers eliminate the hassle of dealing with paperwork, making them more ideal to transact with than traditional banks and mortgage institutions according to an analyst at UBS.
A new ruling also recently forced the banks to separate their investment and retail banking operations, causing most UK banks to change their business operations in the past few years.
HSBC's domestic business, for example, lost around £60bn due to the new ruling, which would've been used to expand their mortgage business and put more pressure against its competitors. Almost all of the UK's banks and lenders also suffered a contraction in their profit and net interest margins. Sixteen out of 20 lenders reported they had weaker margins for the year 2018, while the other two lenders acknowledge the pressures on their mortgage business, according to an analysis conducted by Financial Times.
A Challenging Industry
Metro Bank's CEO Craig Donaldson said that while business bankings have opportunities to manage their margins, it's easier for them to cope with profit margins. However, those mortgage-focused companies may face a challenging year ahead.
While many UK banks have taken advantage of Bank of England's recent rise on mortgage rates, the higher interest fee became less attractive for borrowers, causing them to look for alternative ways to avail of an affordable mortgage.
Image Caption: Golding adds that UK banks must also innovate or digitize their process to provide hassle-free, convenient services to their clients when it comes to mortgage applications.
OneSavings Chief Executive, Andy Golding, said that most aggressive risk-taking was happening in specialized markets such as "second mortgages" or "second charge" on the same properties. According to him, they've noticed how competitors are adjusting their prices to top the risk curve, making more borrowers feel uncomfortable in trading in the said space. That's why Golding says most notable UK banks must expect to overcome these downturns and challenges if they want to thrive in the mortgage industry. He says with the right mindset, they can always turn these challenges into opportunities.