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Smaller lenders need to innovate if base rate is reduced – analysis

  • 07/10/2019
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Smaller lenders need to innovate if base rate is reduced – analysis
The Bank of England’s next base rate move was more likely to be down than up, Monetary Policy Committee member Michael Saunders suggested last month.


Saunders’ comment came on the heels of the Bank saying it would hold the base rate at 0.75 per cent. 

During such a period of low rates, borrowers have been taking advantage while lenders have aggressively cut rates resulting in a very competitive market. 

Mortgage professionals don’t believe a further cut would do much to stimulate the market, but they do think that any effect it does have would be positive. 

A further reduction in the base rate “would stimulate the market slightly,” says Jo Jingree, director at Mortgage Confidence, though she adds it might not have a huge impact.

Meanwhile Steve Jackson, managing director of brokers Jackson Potter, says: “I don’t see this having any adverse effect on the current market as far as consumers are concerned, on the contrary it should give them more confidence and stability with their affordability.” 

Further to this, Dan Wise, head of mortgage finance at Fitch and Fitch said although he sees a drop in rates as a “realistic possibility” he doesn’t “believe a further cut alone would do much to stimulate the housing market but any reduction would remain positive for borrowers”.

Jackson adds that a base rate reduction could see shorter-term fixed and trackers becoming more popular.

Small lender squeeze 

However brokers share the sentiment that smaller lenders may need to brace themselves for the ongoing softness in fixed rates. 

“Fixed rates have been falling regardless, and there is a real fight for market share going on amongst the big players,” Jingree says.

“This, rather than a reduction in the base rate, will see smaller lenders get squeezed out. Smaller lenders need to innovate on their lending policy and service to stay in the game.

“It’s impossible for them to compete with larger lenders on price,” Jingree adds. 

James Chisnall, director at City Finance Brokers, considers that lenders may need to be more creative with product offerings. “In terms of the impact on banks, some might find they make a leaner premium if base rate was to go down or some might offer new and more bespoke products to charge a higher interest rate,” Chisnall says. 

Jackson, on the other hand, admits to being “bemused” by the rush for five-year fixes, but says “it’s worth paying attention to the US Federal Reserve, which recently reduced rates, because that’s a sign that the world economy, regardless of Brexit, is sluggish”. 

Overall, Jackson echoes the general sentiment, saying: “Lenders’ margins will continue to suffer, and the smaller players may need to look at how they are going to entice customers.  

“More bespoke and niche products may be their way forward and this can only benefit the consumer,” Jackson adds. 

Wise, however, is a little more positive regarding the outlook for lenders as he concludes: “Feedback from the BOE suggests most lenders are in a strong place and are unlikely to be effected by a small rate cut, with the jury out on the extent of the potential rate changes I think you would need to watch this space.”

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