Andrew Frankish looks at what lenders might do to stay competitive throughout 2005
2005 promises to be a very different year for brokers and lenders alike. While everyone in the industry will agree that the new FSA regulations have brought significant variations to the mortgage marketplace, the biggest changes are being reserved for that oldest of circumstances – supply and demand.
There is little doubt that the last few years have been kind to lenders, with historically low Bank of England base rate levels fuelling an unprecedented demand for property throughout the UK. Allied to a comparative shortfall in the supply of affordable properties, house prices have risen and, alongside them, mortgage lending has grown to record sums.
But, with rates having crept up again over the last twelve months or so, borrowers are becoming more cautious. And, with recent pronouncements by the Governor of the Bank of England firmly advising of an imminent ‘correction’, lending levels are once again falling.
Maintaining the market
So, against a backdrop of falling demand, what can lenders and brokers do to help maintain a buoyant market? Well, the first point to make is that, while house buying may be less fashionable in 2005, homeowners will continue to demand bigger houses. But, rather than insisting on moving home to achieve their goals, they will tend to look at improving their existing properties, either by building an extension or perhaps converting a loft or cellar.
This, in turn, will help the remortgage market as more and more people look for additional funding to convert their own homes. But, as well as this being a more cost-effective way to gain more space, many borrowers will be reaching the ends of their low rate fixed and discounted deals. As such, I foresee that many lenders will try their best to capture the lucrative remortgage market, whether it be for fund raising, debt consolidation or rate hopping. Evidence of this assertion comes in the form of The Halifax reducing its product rates a short while ago to remain competitive, and to attract borrowers looking to remortgage.
Tempting new clients
Historically, many lenders have been more concerned with attracting new business at the expense of existing borrowers. While this tactic may work reasonably well in a strong market, it is less successful when the market becomes more stagnant. Of course, the theory is that inertia means that, even if they are not receiving the most competitive rate, long-term customers tend to remain faithful to their lender, freeing the lender’s resources to tempt new clients with loss-leading rates, while their current customers mutter and grumble but stay loyal.
This theory no longer holds water though. Over the last few years, borrowers have become increasing fickle as they search for the lowest rates and best deals. And lenders have started to wake up to the fact that they can’t trust their existing client bank to stay reliable unless they offer the same incentives that their new customers benefit from. Here, for example, The Woolwich is leading the way, with some highly competitive deals being offered to existing customers when their incentive periods and current deals end.
Well-trodden path
Product diversification is another well-trodden path in a mature market. And that is exactly what some lenders are already looking at as a way of increasing market share and profitability. The Woolwich is specifically targeting the buy-to-let market as a way of consolidating its share of the lending market by offering more competitive rates. And Mortgage Express has launched a completely new product called Max 130 in direct competition with offerings from the Northern Rock and Coventry. Briefly, Max 130 will allow customers to borrow up to 130 per cent of the value or purchase price of their property, and demonstrates that the lenders are thinking on their feet, launching new products to stimulate demand in a highly competitive marketplace.
Competitive edge
As lenders continue to search for that elusive competitive edge, 2005 will see more of them moving online, where costs are lower and customer service easier to satisfy. This should enable them to pass on the savings and efficiency improvements they make in the guise of lower product rates.
From a broker perspective, this year will also have its upside. Our business for example has actually experienced an increase in enquiries and conversion rates, largely attributable to more effective client bank maintenance and targeting as well as an increase in the number of introducers.
My view is that the reduction in the number of brokers that we have experienced could be as much attributable to the establishment of the FSA as regulators of the mortgage industry as the downturn in overall borrowing levels. Indeed, there is a strong argument to say that such a reduction remains an inevitable consequence of the increased costs associated with being compliant, especially with regard to software and reporting requirements.
So, while we can certainly say that 2005 will be more challenging for the industry than recent years, it will certainly herald the arrival of some interesting, original and competitive product initiatives.
Andrew Frankish is managing director of Mortgage Talk
