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Base rate cut could bring ‘difficult decisions’ for lenders – analysis

  • 22/01/2020
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All eyes are on the Bank of England’s (BoE) Monetary Policy Committee (MPC) with the possibility of a base rate cut on 30 January rising, but how will it affect the mortgage market if it goes ahead?


Brokers anticipate a cut will intensify what is an already fiercely competitive marketplace.

Competition could take the form of deeper rate cuts on mortgage repayments. And brokers expect this will lead to a richer choice of product offerings and better service from lenders.

“What can happen is clients see there’s a drop in rates by 25 basis points and automatically presume fixed rates will reduce by that much. The reality is that doesn’t happen,” says Adrian Anderson, director at Anderson Harris.

“But the market has been so competitive that it wouldn’t surprise me if some of the prime rates were to reduce,” Anderson said.

Greg Cunnington, director of lender relationships and new homes at Alexander Hall, adds: “Mortgage rates look like they’ll remain low for the whole of 2020.”


Top six dominate

Brokers agreed that a low-rate scenario would see the big six lenders continue to dominate, particularly in high-volume business. Meanwhile, mid-size and smaller players could be pushed toward riskier deals.

“If you look at the top of the tables now, you will start to see the big banks beginning to dominate. That’s become the case more recently because they have access to funds and appetite to lend,” says David Hollingworth, associate director, communications at London & Country Mortgages.

“There’s so much competition, someone will move. The big banks may feel the impact less than others in the market and may be tempted to cut a little more than some would like,” he continued.

“It forces other lenders to look higher up the loan-to-value (LTV) scale. Over time that starts to bring down rates for those borrowers as well and you’ll see more spread from lenders in what they’ll target.

“For the mid-size mutuals, very definitely there are difficult decisions around margin,” Hollingworth adds.


Manual underwriters a must

If the base rate does shift, brokers anticipate a slew of new products and criteria this year.

“It could be an interesting market where the top six innovate and introduce new really good criteria points,” notes Alexander Hall’s Cunnington.

Mid-size and smaller lenders particularly would need to devise new ways of attracting business.

“As we saw with Tesco and Sainsbury’s leaving the market last year, it’s very difficult for any lender to compete with the big six when it comes to rate competition because the margin’s just not there,” Cunnington continues.

“They’ll have to look for other areas of the market they’re comfortable going into and that’s something we could see in the coming weeks.”

The area of focus could include new builds, manual underwriting and interest-only.

“Manual underwriting is a big one,” Cunnington says.

“There are a lot of very high quality customers out there who don’t quite tick those boxes but are a really good opportunity for lenders if they just have a facility in place for the intermediary to speak to them and talk through the case on a one-on-one basis.

“That’s an area we’ve seen the market massively improve on with some of those lenders. And obviously it means there is an opportunity to make a little bit of margin there, because you can have your rates a little bit higher if you’re offering lending that nobody else can offer,” he adds.


Lender and broker cooperation

Manual underwriting goes hand-in-hand with lenders sense-testing new ideas with brokers before bringing them to market.

Cunnington explains the firm is seeing lenders approach intermediaries like it before they go to market.

“They’re saying: ‘These are the ideas we have. Is this backed up by what you’re seeing? Would we get any volume on it? Is it worthwhile? How would you shape it?’,” he says.

“When they do that you get something that works for everyone. It’s gone wrong in the past when lenders have brought things to market they’ve only discussed internally. We’re finding now that they meet at a more embryonic stage, which is great because things are coming to market that everybody wants.”

Conversations such as these have led to moves up the LTV scale, top-slicing on buy-to-let and changes to LTVs on interest-only products.

“Santander last year went to 85 per cent on a part-and-part basis, which has proved very popular; other lenders may look to copy that,” Cunnington continues.

“The lender security is still there because you can still cap at 50 per cent interest-only, but the initial down payment for the client is lower. It helps the purchase market because not everybody has a 25 per cent deposit.”


Survival of the biggest

Getting creative with criteria could be the best defence against further casualties in the market if rates do go lower. 

“Unless the lenders are doing a good amount of volume, or have something striking about their criteria, I wouldn’t be surprised if a few were to drop by the wayside. The margins are so thin and there’s so much competition,” says Anderson, noting that “it might be the smaller banks.”

“We were excited when Tesco and Sainsbury’s launched, about how they would be a bit different and of course they are names people are aware of and comfortable with, outside of finance.

“But if you look at the brutal reality of why they’ve left the market it’s because it’s so competitive and they can’t keep up,” Anderson concludes. 


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