With interest rates at their lowest level since the 1960’s we are enjoying a sustained period of the most affordable mortgage payments in at least a generation of homebuyers.
There has to be a limit to how far mortgage rates can fall and with a bank base rate of 4% and further cuts unlikely, it would appear that this is as good as it gets. The level of discounts on offer at the moment means that pay rates below 5% or even 4% are available.
The level of the discounts is driven by various factors including the desire of lenders to start the New Year on a positive note and make an attempt to get ahead of the year’s target at the earliest opportunity.
There may come a point in this low rate interest cycle at which a lender cannot sustain their business on anything approaching a profitable basis. There are bound to be casualties, as lenders struggle to sustain the volumes of applications needed in a low rate/low margin environment.
Not every lender will have the option of diversifying into a higher margin area of lending, they just don’t all have the expertise to operate in all areas that have traditionally meant higher margins. Areas such as self- certification, buy-to-let and minor adverse credit are all areas that need specialist underwriting. Some organisations will buy in the operation needed to operate effectively in the chosen new markets, but many of the smaller businesses cannot afford this route.
Attempts at cross-selling to improve the overall level of income have met with varying degrees of success and failure. Customers will not just respond to a mass marketing campaign for a product that is not fairly priced or unique in its offering.
The strategy of lenders needs to be more sophisticated. An approach that is clearly perceived to add value to the overall relationship and that aids retention is called for. The alternative is that the add-on transactions may please the lender at the point of sale, but may be one more reason why a customer decides to move the mortgage.
If lenders are unable to benefit sufficiently from higher margins elsewhere, then they will have no choice but to reduce the discounts available and to increase the fixed rates. The current low rate scenario is just not sustainable and bargains should be snapped up at the earliest opportunity.
Simon Jones is associate director at Savills Private Finance