Higher interest rates, the end of government funding schemes and tougher tax of buy-to-let investors are being seen by some as creating a triple threat for challenger banks.
The Bank of England has recently ended its Funding for Lending scheme and the larger Term Funding Scheme.
Both schemes were designed to encourage banks and building societies to lend more to households and businesses.
Rob James, banks analyst at Old Mutual Global Investors, said this meant “the government was essentially giving free money to banks for them to lend out”, a situation that particularly helped the newer challenger banks grown.
“[The two government schemes] benefit the challenger banks more than the large incumbent banks because, the challenger banks have not had to worry about getting savings deposits in, so they could just focus on growing their share of the [mortgage] market.
“But with the government scheme ending, that benefits the banks that have the big base of current accounts, because they will be able to keep lending.”
He said some challenger banks are likely to have to use the wholesale funding markets to raise finance as the government schemes come to an end, which increases the the cost to banks of issuing new mortgages, due to not having as large a base of current account customers.
As FTAdviser has previously reported, the impact of higher funding costs for mortgage providers is already being felt in the buy-to-let market, where a report from Mortgages for Business shows that buy-to-let mortgage providers are having to reduce their margins in order to win market share.
Mr James’ analysis is that this will happen in the wider mortgage market, and that the inevitable consequence is that mortgage rates will increase, whatever happens to UK interest rates.
A representative of challenger bank Shawbrook, which only provides buy-to-let mortgages and remortgage products, said while the Bank of England schemes have provided funding at attractive levels for banks, “this benefit has mainly been passed through to clients in the form of aggressive price competition”.
“The effect has been exaggerated because banks have not applied the benefit uniformly across their product range, with pricing in some segments often driven by one or more banks concentrating much of their funding benefit into that area, dragging down product margins further than might be expected and placing pressure on specialist players like Shawbrook,” they admitted.
“In addition, the easy liquidity and benign credit environment have led some banks to expand their lending into areas from which they will withdraw as the surplus liquidity begins to recede.”
However the end of the government schemes’ cheap money could see big banks’ withdrawal from specialist areas of the market, which would mean lenders that remain in those niches would have increased pricing power, even if their funding costs rise, Shawbrook said.
David Hollingworth, associate director for communications at mortgage brokers London & Country Mortgages, said the range of lenders using the term funding scheme was virtually across the board, from the mutual associations right through to the big banks.
“We have seen very keen mortgage rates, and they may have gone to record lows anyway due to low base rates, but it is hard to see how the term funding scheme, couldn’t have had an impact.
“Now that has come to an end at the same time as the market is expecting the base rate to rise. Both of those will cause mortgage rates to rise, and it won’t be obvious how much of it will be the term funding scheme.”
He added that an environment of tighter liquidity will likely have less impact on the bigger banks, as they have a wider range of funding options.
Paul Richards, chairman of Ignis Cash Solutions, said that end of the Term Funding Scheme is potentially more important for savers than the Bank of England increasing the base rate.
He said this is because commercial banks will have no choice but to increase the rates they offer to savers in order to acquire the funding they need.
Source: FT Adviser