The so-called mortgage price war that saw lender profits tumble and some banks pull the plug on mortgage lending in the past year is set to continue throughout 2020, brokers have warned.
Luke Somerset, chief commercial officer at broker firm John Charcol, said the sustained pressure on mortgage pricing was “likely to continue into 2020 and beyond”.
Over the past few years a competitive mortgage space has seen lenders cut rates in a ‘race to the bottom’. The average mortgage rate for a 10-year fixed mortgage stood at a record low of 2.76 per cent as at the end of November.
The average two-year fixed has sat below 2 per cent for those with a 40 per cent deposit over the past year while the rates of five-year fixes have also been declining steadily throughout the year.
Mr Somerset said: “Most of the significant news in mortgages in 2019 has related not to economic or political uncertainty, but the ongoing pressure on margins for lenders.
“Some big names have been forced to throw in the towel in 2019 with the likes of Tesco Bank withdrawing their mortgage range. This pressure is likely to continue into 2020 and beyond.”
Tesco pulled the plug on its mortgage lending arm in May, citing challenging market conditions and “limited profitable growth opportunities” as the key reasons.
Looking forward, Mr Somerset said it was “widely assumed” that the money markets had already priced in the impact of Brexit so it was unlikely anything “overly exciting” would happen to swap rates — the rates at which the money markets lend among themselves and to lenders which partly underpin the rates at which consumers can borrow.
He also noted the Bank of England had headroom in terms of the base rate, should the economy need a boost.
Mr Somerset said this interest rate scenario, combined with the fact lenders were sitting on “plenty of capital”, meant lending rates were unlikely to increase beyond a few basis points. He added: “If anything, we may see a few reductions in rates.”
Retail banks are flush with cash due to a shake up of regulation which came into effect on January 1, 2019. The new Bank of England rules 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.
This scenario was not likely to change in 2020, according to Mr Somerset.
By Imogen Tew
Source: FT Adviser