Mortgage Advice Bureau
Lenders are beginning to complain the downward trend in interest rates leaves too little room for manoeuvre on margins. Fixed-rate mortgages are available below 4%, they accounted for half of May’s home loans, and lenders are tempting borrowers with flexible fixed-rate schemes involving no penalties or tie-ins. Lenders simply do not have the profit margins to carve out new inducements.
As long as mortgage loans remain available at less than 4%, the bias toward fixed-rate mortgages will continue. Gordon Brown and some consumers want to see long-term fixed rate mortgages in the marketplace, but to others the idea of a 25-year or even lifetime mortgage at a fixed rate goes beyond certainty and may feel like a trap.
Coventry Building Society
With rate levels unprecedented in living memory these are uncharted waters. We are very conscious in this scenario to make sure we protect rates paid to savers, many relying on savings for income.
A low interest environment also reduces return generated from a financial institution’s reserves and they must also balance the mix of business, with investors moving money to higher paying accounts, for example ISAs. There is also some evidence of a move to put cash back into equities, National Savings and Premium Bonds. All these things will reduce money available for lending purposes, and financial institutions must ensure that they are able to satisfy demand.
The base rate cut has clearly taken some consumers by surprise. Over the last few months fixed rates have been popular, but as borrowers realise this may not be the last cut we will see tracker mortgages regain popularity. This poses a problem for lenders and packagers with a limited product range.
Low interest rates means remortgaging levels are high, with customers demanding low-priced products. Little surprise then that customer retention is at the top of the agenda for competitive lenders in the market. Winners will be those adding significant value to consumers and, post-regulation, it will be the low-cost product providers who will come out on top.
For some lenders offering loans that track BBR or Libor, a change in base rates has a lesser affect. With a standard variable rate (SVR) it can be a more complicated decision process, particularly where lenders have to consider the needs of savers. Lenders can also be exposed to a reputational risk if they do not pass on the full rate reduction to borrowers.
However, the reality is that reducing SVR in line with base rate changes over-simplifies lender’s pricing models. There are many other factors it needs to consider such as funding sources, competitive positioning, internal resources, distribution and profit targets.
For lenders the rate cut is an opportunity to adjust margins. They have suffered as their back book has left to remortgage in large numbers. However, there is no question of lenders trying to make increased profits, I do not think that it is possible in this competitive environment. When lenders have not passed on the rate drop, generally, saving rates have also not been reduced.
The public have not been abandoned. Also, when base rates drop, the return that lenders get on their free reserves will drop, and that narrows margins. Packagers do not fund themselves so are not too exposed. There will be pressure on them to cut margins but not after just one drop in rates.
The problem facing lenders is do they please borrowers or deposit customers? Savers’ rates are at an all time low and money is leaking into other investments, even buy-to-let investments, as returns on deposit fall further. Deposit based lenders are also seeing lenders not reliant on deposit money passing on the full cut in rate, adding to pressures.
Packagers have a margin costed into the product, and the lower the rates go, this margin is made to look bigger in terms of percentage of the rate, lenders will need to maintain their product pricing and may therefore be looking at reducing this margin, but this would be likely only in limited circumstances or on particular product promotions.
Other than increased administration costs, a rate cut does not cause problems for packagers. For lenders however it is a different story. Lenders always get PR flack if they do not cut mortgage rates in line with the reduction in base rate or reduce savings rates by more than it. Their problem is they are paying rates so low on some savings and current account balances that they cannot cut these rates by the full 0.25%.
To maintain margins, they must either cut other savings rates by more than a quarter point or mortgage rates by less. In addition, some lenders have savings accounts with a minimum guaranteed rate, which they are already paying, so these cannot be cut either.