How will interest rate hikes influence the specialist lending rates battle?
The lending landscape is intricately intertwined with the Bank of England’s base interest rate, rendering it highly responsive to any decisions that are made on Threadneedle Street.
As such, the past 18 months have been defined by transformation within the mortgage and specialist finance sectors.
In previous years, when the base rate remained at historically low levels below the 1% mark, many lenders’ marketing and sales strategies centred around driving their rates to their lowest possible thresholds – something of a ‘rates war’, or a ‘race to the bottom’.
However, Paresh Raja (pictured), chief executive of Market Financial Solutions, believes that with the Bank of England elevating its rate from 0.1% to 5%, lenders have been compelled to undergo a period of transformation.
How rising interest rates have influenced the ‘race to the bottom’
Raja said one might assume that the Bank of England’s hiking cycle would intensify a push among lenders to have the lowest possible rates.
“At the beginning of this year, mortgage lending was projected to decrease by 15% in 2023; given these circumstances, offering lower rates to maintain loan volumes would appear to be the natural choice,” he said.
However, Raja said we are witnessing a discernible shift in lenders’ strategies - not to mention the priorities of brokers and borrowers - and he added that the reliance on simply offering low rates has started to diminish. Many economists now foresee the base rate reaching 6% by the start of 2024 and lenders have had to move quickly.
“Naturally, lenders factor these forecasts into their product offerings and rates, effectively curbing their ability to provide the discounted rates that have been a staple of the lending sector’s rates war,” Raja said.
Instead, then, Raja said specialist lenders are increasingly emphasising other qualities and USPs, whether that is an ability to handle complex cases, deliver loans at speed, or levels of service that differentiate themselves from their competitors.
Prioritising other options
“A lender’s flexibility, speed, and range of options have all become crucial factors in borrowers’ decision-making processes,” Raja said.
In Q1 of this year, he noted there was a notable surge in bridging loan transactions; a 68% increase was recorded compared to Q4 of 2022. Facing heightened uncertainty surrounding interest rates, he said, borrowers are seeking specialised financial solutions to execute their investment plans.
“This surge in demand can largely be credited to the tightening of lending criteria among mainstream lenders, reducing the options on offer for more complicated borrowers,” Raja added.
Notable examples come from HSBC and Nationwide which, in the previous year, Raja said have raised the minimum income threshold for mortgages from 4.75 times a borrower’s annual income to a minimum requirement of £50,000 per annum. Consequently, Raja said as risk levels have escalated for traditional lenders and banks in recent months, borrowers with more complex financial histories or unique circumstances have encountered difficulties in securing the necessary financing.
Related: HSBC's latest mortgage rates
In turn, he said brokers have explored their clients’ options in the specialist finance sector in order to secure them the best possible deal.
Providing a more complete service
“Recognising this shift in borrower preferences, specialist lenders’ focus on flexibility and certainty enables them to stand out in a market where mainstream providers are increasingly retreating, ensuring borrowers have access to the complete service and support they require in an ever-changing economic landscape,” Raja said.
For example, Raja said specialist lenders differentiate themselves by underwriting loans right from the beginning, enabling them to effectively manage even the most intricate and complex cases.
“This unique approach empowers them to make firm commitments to deals that other lenders may initially engage with but ultimately withdraw from,” he said. In turn, Raja said these lenders can forge stronger relationships with brokers and their clients who may possess adverse credit histories, intricate financial structures, or undervalued properties, enabling them to invest in the UK property market with confidence.
Furthermore, in light of the ongoing impact of inflation on spending power, Raja said borrowers facing cash flow challenges require breathing space to remain active in the market.
“Many lenders have recognised their predicament and have taken steps to enhance their rolled-up or deferred interest options,” he added.
By offering borrowers the opportunity to defer interest payments until the end of the loan term rather than burdening them with monthly payments, Raja said lenders can help reduce borrowers’ immediate financial obligations.
With inflation continuing to exert pressure on the short-term financial situation of many homeowners and landlords, Raja believes this will be an increasingly important way of supporting borrowers in the coming months, and that lenders will continue to seek fresh approaches to providing value and support to brokers and borrowers.
Why do you believe lenders have shifted strategies and are competing less on rates? Let us know in the comment section below.
