Datamonitor says that this trend will make the next few years tough for mortgage lenders. The report reveals that in addition to a slowing market, the UK’s mortgage industry faces new challenges brought about by the reshaping of the distribution landscape and a more competitive market. "Lenders will need to devise cost effective strategies in the light of increasingly wafer thin margins and inject a more innovative approach in order to secure a share of the market," comments Edward Ripley, Financial Services analyst at Datamonitor and author of the report.
2004 was a year of two halves for the UK mortgage market. Strong growth in house prices in many regions of the UK in the first six months of 2004 continued to drive average mortgage advances. Even intervention by the MPC** seemed to do little to cool it. However, the market’s performance in the last quarter of the year was less impressive, mortgage lending declined by 15% in comparison with the same period in 2003.
Datamonitor forecasts total UK mortgage lending will drop by 10% by 2007 (from £292 billion in 2004 to £264 billion by 2007). Loans for house purchase will decline by 15 per cent to £117 billion in 2007 compared to £138 billion in 2004) as transactions fall. Recent increments in the base rate followed by a more stable base rate environment will limit rate-based remortgaging. Fewer people will look to withdraw equity as house prices slow. For this reason remortgaging will decline by 6% over the next three years to £115 billion in 2007.
The majority of lenders in the UK compete on fixed short-term discounted deals to attract customers. These newly acquired customers are then expected to become profitable when they move to the lender’s standard variable rate (SVR) after the end of the discounted period. However, more and more customers ('serial remortgagers') are regularly switching lenders to take advantage of cheap discounted offers. For example, MORI FS data shows*** that the average length of time mortgage holders within the age bracket 35-44 stay with a lender before switching to a new one has fallen from 7.8 years in 1997 to 5.4 years 2004. Over the past few years, increased churn coupled with aggressive price-led acquisition strategies has eroded many lenders margins.
"Mortgage churn will remain predominant given lenders willingness to compete aggressively on price. However, some lenders will turn their backs on short term price-led acquisition strategies and serial remortgagers and develop selective acquisition processes to prevent future churn," comments Ed Ripley. Datamonitor also expects to see more lenders offering one rate for both new customers and existing customers in an effort to retain them.
New regulation has also imposed challenges for all sections of the mortgage market such as disclosure requirements to customers (KFIs), training and competence requirements of advising staff and changes in financial promotion which are fundamentally reshaping the way in which mortgages are now sold.
On October 31st 2004, the era of self-regulation in the UK mortgage market drew to a close as the powers of the FSA extended to cover the sale and recommendation of most mortgage products. This has had, and continues to have, huge implications for all players in the industry. With their attention throughout 2004 focused on ensuring their systems, practices and KFIs were compliant with the new regulatory regime, some mortgage lenders experienced a short term lull in business volumes in the latter halfof 2004. “The most significant of these changes have occurred in the way in which mortgages are distributed through intermediaries. For instance, large networks are expected to play an increasingly significant role in the distribution of mortgages. Consequently, lenders will need to ensure that their products are represented on these channels. They will have to prove their worth through negotiation and perhaps reduced margins in order to protect their market share and gain access to the right panels,” concludes Ripley.
