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The so-called mortgage price war has slashed lenders’ profits in the first half of the year, with some banks and building societies seeing their income drop by up to 10 per cent.

Sustained pressure on mortgage pricing — due to a competitive mortgage space which has seen lenders cut rates in a ‘race to the bottom’ — has affected lenders across the board and caused profits to plummet at some smaller firms, according to their latest half-yearly results.

Leeds Building Society reported a total income of £101m for the six months to June — a decrease of 10.4 per cent year-on-year — and saw its profits reduce by almost £10m (an 18 per cent drop year-on-year), putting the results down partly to sustained pressure on mortgage pricing.

Meanwhile, Coventry Building Society reported the “depth of competition in mortgages” — alongside economic and political uncertainty — had resulted in “strong price competition” when its results showed its total income of £189.8m had dropped by 10.5 per cent compared with June 2018.

The society’s net interest margin — the difference between the profits made from investments (mortgages) and the interest paid out to savers — narrowed by 14 basis points compared with the year before due to “continuing competition in the mortgage market” and the “absence of notable growth in the housing market”.

The situation was similar with Nottingham Building Society, which reported “increasing competition in the face of muted demand for mortgages” meant new mortgage rates continued to fall despite their “already record low levels”.

Nottingham stated it had moderated its lending plans in the face of these falling rates as it was “not sustainable to grow” at the same rate it had done. It reported a decrease in net interest income of £1.8m year-on-year — down 7 per cent.

The challenging market conditions saw Tesco Bank pull the plug on its mortgage lending arm, and its chief executive said the market had left it with “limited profitable growth opportunities”.

Yorkshire Building Society’s net interest margin of 1.06 per cent was down from 1.13 per cent in 2018, while Skipton Building Society saw its margin drop 12 basis points when compared with the year before.

Skipton stated its decline in margins was reflective of “intense competition in the mortgage market” and said the ongoing pressures meant it anticipated lower profits for 2019 than the year before.

Meanwhile Yorkshire said: “We continue to see margins under pressure across the mortgage market, driven in part by the competitive actions of the newly created ring-fenced banks.”

New Bank of England rules, applicable from January 1 this year, created a firewall between the banks’ investment banking operations and their lending arms to ensure they were still able to lend and consumer money was safe even if a shock hit the banking sector.

With the ring-fence in place, funds which formerly could have been used to back riskier investments are now trapped in the retail environment and being diverted to the mortgage market, which has amplified the price war.

Although the mortgage price war has not affected these larger retail banks to the same extent as building societies and challenger lenders, most still reported the competitive market had impacted their profits and margins.

For example, Barclays reported a total income of £3.57bn, an increase from last year, but said this had been “offset by mortgage margin compression”, while Lloyds’ said its net interest margin had narrowed by five basis points since H118 due to “continued mortgage competition”.

A “fall in income due to the highly competitive mortgage market” impacted Santander’s profitability as its net interest margin dropped 11 basis points and its profit before tax was down 36 per cent year-on-year to £575m.

Santander reported this was also down to pressure from the mortgage back book as more customers opted to come off the standard variable rate.

Data from Moneyfacts showed the average rate of a two-year fixed — 2.49 per cent — is more than 1 percentage point lower than the average in August 2014 (3.54 per cent).

Longer term fixes have dropped even more substantially. In August 2014, the average five-year fixed sat at 4.22 per cent, compared with 2.84 per cent in today’s market.

The Bank of England has warned lenders it is “watching them like a hawk” amid the price war, cautious that lenders do not opt for riskier lending to make up for lost margins.

By Imogen Tew

Source: FT Adviser

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