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Lenders take profit hit in mortgage price war

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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Maximum borrowing tops broker searches

Brokers most frequently searched for lenders using a maximum borrowing limit in December, a mortgage search platform has revealed.

Knowledge Bank released the monthly data from its criteria searching system today (January 10), which contained more than 80,000 criteria covering 150 lenders.

According to Knowledge Bank, broker activity remained high in the final month of last year with brokers most frequently searching for maximum borrowing criteria in the residential, second charge and self-build categories.

Searches for Help-to-Buy remained in the top five residential searches, a month after making its first appearance on the list last year following an extension of the government scheme in the Autumn Budget.

In the buy-to-let sector, searches for lenders happy to lend to limited companies featured most frequently in December – a pattern matched by lender reports of landlords increasingly transferring properties to limited companies to navigate tax changes in the market.

But searches for lenders willing to lend to first time landlords featured as the second most commonly searched criteria in the buy-to-let sector, closely followed by requirements for first-time buyers.

Nicola Firth, chief executive of Knowledge Bank, said: “The year ended largely as it had started with a huge number of searches across the different product areas.

“During 2018 new lenders entered the market but it was product innovation that really was the stand out change.

“With interest rates remaining low, lenders continue to compete on criteria in addition to rate which makes it increasingly difficult for a broker to know who will or won’t accept their client.”

She added: “On average brokers searched on five individual pieces of criteria for each borrower which shows how essential it is for a system to ensure that cases are not sent to lenders who will inevitably turn them down.”

Source: FT Adviser

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Self-employed mortgage market is ‘no fad’

Evidence of the growing sustainability of the self-employed mortgage sector has been reinforced as the latest data from Knowledge Bank’s revealed it was the most searched for criteria in the residential market.

Lenders who would accept self-employed applicants with one year’s worth of accounts have now been the top search on its Criteria Activity Tracker for three months.

Revealing its top five most searched criteria in November, Knowledge Bank also reported a strong leaning towards higher loan-to-value (LTV) mortgages – a trend which has continued from last month.

Knowledge Bank revealed ‘maximum LTV’ was one of the top five searches in six out of eight product categories within its system.

Buy-to-let

Within buy-to-let, the most commonly searched for criteria was ‘lending to limited companies’ which suggested, said Knowledge Bank, borrowers were looking for the most tax-efficient ways to enter the market.

There was also a focus on entering the sector too, with ‘first-time landlord’ and ‘first-time buyers’ being amongst the most popular searches.

Residential

Within residential mortgages, the top search was for lenders who would accept self-employed applicants with only one year’s accounts. This is the third month it has appeared as the most common search.

Knowledge Bank said it highlighted the self-employed market was ‘certainly no fad’ but a sustained borrower segment.

Help-to-buy and equity loan schemes also made it into the top five searches for the first time in 2018, highlighting the diversity of borrower requirement brokers face on a daily basis.

Equity release

In the equity release sector the top search was for early repayment charges. Knowledge Bank said this reflected the burgeoning product options in the equity release sector and the desire for borrowers to understand any restrictions, should they find an alternative loan solution in the future.

Comment

Nicola Firth, CEO of Knowledge Bank, said its tracker showed activity at the ‘coal face’ of broker activity.

She added: “As we approach the end of the year the pressure on brokers to find lenders for their clients’ mortgage needs becomes more and more intense.

“As a result it’s crucial that no time is wasted trying to pair borrowers with lenders whose criteria simply excludes them.

“As you can see from this month’s activity tracker although some searches remain popular from month to month new search topics are regularly breaking into the top five.

“This is partly due to ever-changing and complex borrower requirements and also as a result of product innovation from lenders that opens up borrowing opportunities. With this constant change it’s crucial that brokers use the tools at their disposal to make their advice process even more focused and productive.”

Top five searches performed by brokers on Knowledge Bank by brokers during November 2018 (Source: Knowledge Bank):

RESIDENTIAL BUY-TO-LET SECOND CHARGE EQUITY RELEASE
1 Self Employed – 1 year’s accounts Lending to limited companies Maximum loan to value Early repayment charges
2 Maximum loan to value First time landlord Debt Management Plan (DMP) – Ongoing / Current Minimum borrowing / loan amount
3 Maximum age at end of term / loan to age First time buyers Interest Only Downsizing protection option
4 Overtime – fluctuating Requirement to be a homeowner / owner occupier Maximum borrowing / loan amount Home reversion plans – early vacancy guarantee
5 Help to buy / equity loan scheme Maximum loan to value Consumer buy to lets Ex-council / Local Authority houses
SELF BUILD BRIDGING OVERSEAS COMMERCIAL
1 Maximum loan to value Regulated bridging Self-employed – Director / Limited company Semi-commercial properties
2 Accountant’s letter / certificate – accepted Maximum LTV for bridging Lending to limited companies Maximum loan to value
3 Stage payment type – advance Development bridging – maximum loan to cost Minimum income – interest only / part and part single applicant Commercial Investment Mortgages
4 Retained / additional property in the background Bridging – maximum borrowing / loan amount Limited company to a sole trader Commercial owner occupier
5 Self Employed – 1 Years Accounts Minimum borrowing / loan amount Buy-to-let Planning permissions

Source: Mortgage Finance Gazette

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More brokers expect lenders to tighten credit policies than relax them

Around 57% of brokers operating in bridging, development and asset finance expect lenders’ credit policies to stay largely unchanged over the next 12 months, United Trust Bank’s recent broker sentiment survey has found.

There were slight variations between brokers operating in the different sectors but, on the whole, 57% of brokers expect lenders to keep their credit policies broadly similar, 32% expect them to tighten and 11% predict that lenders would relax them.

Harley Kagan, managing director, United Trust Bank, said: “It’s good to see that most brokers believe lenders are already operating with an eye on the future.

“However, it’s perhaps unsurprising given the level of uncertainty surrounding Brexit, the UK economy and the residential property market, that many brokers feel some lenders will be tightening their purse strings over the next 12 months.

“Anecdotally we’ve heard from some brokers that lenders who were once happy to consider certain loans are now being far more cautious even with well-established customers.

“This ambiguity will frustrate brokers, but as long as they’re aware that experienced, ‘through the cycle’ lenders like UTB are still very keen to lend, they should be able to find quick and competitive funding solutions for their clients.”

For bridging finance, 58% think lenders’ credit policies will stay broadly the same, 28%think lenders will tighten their credit policies and 14% think lenders will relax their credit policies.

For development finance, 60% reckon lender credit policies will stay broadly the same, 33% think they will tighten their credit policies and only 7% reckon they will relax their credit policies.

Under asset finance 53% predict lenders’ credit policies will stay broadly the same, 35% thought they will tighten them and 12% expect them to relax their credit policies.

Kagan added: “From a broker perspective there are obvious advantages to dealing with a specialist lender which can quickly adapt to changing market conditions and be flexible in applying their credit policy to marginal cases.

“At UTB we consider every proposal on its merits and when required will use our knowledge and experience to formulate a solution which will hopefully give the borrower and the broker what they need whilst satisfying the Bank’s risk appetite.

“United Trust Bank is an approachable and dependable lender. We help housebuilders, property developers and SMEs who wish to seize opportunities in spite of uncertainty and support them through the ups and downs of the economy and the housing market.”

Source: Mortgage Introducer

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Bank stress tests: longer-term resilience of lenders to be revealed

For first time lenders including RBS have been tested on resilience over seven-year scenario and not just to economic shocks

The Bank of England is to reveal the damage inflicted on the UK’s biggest lenders from £30bn of hypothetical consumer loan losses, an economic downturn and a collapse in the pound.

Threadneedle Street’s latest health check on the sector – the first was conducted in 2014 – could have an impact on a bank’s ability to pay dividends and on its business models. The lenders could be forced to sell off assets or ask existing shareholders and bondholders for more cash if they fail the tests based on hypothetical scenarios intended to put the sector under severe stress.

The results will be published on Tuesday alongside the Bank of England’s latest assessment of risks to the financial sector against the uncertainty created by Brexit.

Royal Bank of Scotland, which is still 70% taxpayer-owned, will be closely watched after it failed the stress test a year ago, and because it is being readied for privatisation by the chancellor, Philip Hammond.

In last week’s budget, the Treasury said it wanted to sell off £15bn of its stake in RBS, which is worth about two-thirds of the bank’s current value, even though this would leave taxpayers with a £26bn loss.

As well as RBS, results will be published for Barclays, HSBC, Lloyds Banking Group, Standard Chartered, Nationwide Building Society and the UK arm of the Spanish bank Santander. All are holding more capital than before the credit crisis and their financial strength has been measured against a series of hypothetical scenarios, including a 4.7% fall in UK GDP, a 33% fall in house prices, interest rates rising to 4% and 27% fall in the pound.

Threadneedle Street has already warned that under the scenario lenders could incur £30bn of losses over three years through lending on credit cards, personal loans and car finance. On Tuesday, it is expected to become clearer how the £30bn is distributed among lenders and which lenders the Bank of England has demanded hold extra capital against these loans.

Each lender has its own pass rate and the Bank will announce how each has coped with the tests.

For the first time the lenders have been tested not only on their ability to withstand economic shocks. They have also been tested on an exploratory scenario that will examine banks’ resilience over seven years of weak global growth, low interest rates and high legal costs and fines for misconduct. It will also look at the viability of their business models.

RBS is facing the added uncertainty of a multimillion pound settlement with the US Department of Justice over the way the bank packaged up and sold mortgage bonds in the run-up to the financial crisis. RBS has said it wanted to reach a settlement for this residential mortgage bond securities (RMBS) scandal. On 23 December last year, the DoJ extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse in relation to this toxic bond mis-selling scandal.

Gary Greenwood, an analyst at Shore Capital, said this so-called conduct risk could lead to a “technical fail” for RBS, which last year had to cut back on risks when it did not meet the hurdle rate.

Analysts at Royal Bank of Canada do not expect RBS to fail and point out Barclays has a higher hurdle rate and in last year’s tests had higher losses on consumer finance than average.

Source: The Guardian