Market will require significant interest rate cuts to see substantial growth, says Bloomberg Intelligence
High street lenders HSBC, Barclays, NatWest, and Lloyds face mounting pressure on their net interest margins (NIM) due to tightening mortgage spreads, according to a new pricing study by Bloomberg Intelligence (BI).
The market research provider noted that while the UK housing market benefits from sub-4% rates and rising loan approvals, the £1.6 trillion mortgage market will require significant interest rate cuts to see substantial growth.
According to Tomasz Noetzel (pictured), senior industry analyst at Bloomberg Intelligence, competition in the mortgage market is set to intensify as lenders engage in pricing wars to secure lending volumes after the Bank of England’s monetary easing in August.
“Since our June update, two-year 75% LTV offers have fallen by 50 basis points (bps) on average to 4.6%, the largest decrease across two-year LTV offers, reversing previous gains this year,” Noetzel said.
Bloomberg Economics has predicted one more rate cut this year, with market-implied rates pointing to 130bps of BoE cuts over the next 12 months, which could drive mortgage rates even lower.
BI’s analysis also suggests that margin pressure on UK banks will persist through 2024 and into 2025, as the gap between new mortgage rates and existing loans dilutes net interest margins. For instance, Lloyds and NatWest’s new business spread stands at 70bps, while the spread on maturing mortgages coming off the balance sheet is around 110bps.
Lloyds attributed a four-basis-point hit to its Q2 2024 NIM to this dynamic, with the bank reiterating that mortgages remain a strategic focus despite the margin squeeze. NatWest reported a smaller impact on its margins, with a one- to -two-basis-point reduction in Q1 and Q2, and its total mortgage balance shrinking by 1.5% to £202 billion in the second quarter.
“The gap between five-year fixed mortgage rates and two-year products at 75% LTV remains around 40 basis points, unchanged since June,” Noetzel added. “Banks are reducing prices to attract longer-duration mortgages for better visibility on their net interest income.”
As of early September, NatWest offers the lowest two-year 75% LTV rate at 3.93%, followed by Barclays at 3.95%. Five of the 13 lenders sampled offer rates below 4%, while Santander UK has the second highest rate at 4.48%, having made a modest 20-basis-point cut in recent months.
Meanwhile, high mortgage costs continue to weigh heavily on younger borrowers, exacerbating the wealth and homeownership divide, according to BI. UK mortgage growth has stagnated at around £1.6 trillion over the past two years, as high interest rates have curbed demand.
The recent fall in two- and five-year swap rates to approximately 4.1% and sub-3.8%, respectively, reflects market expectations for further monetary easing. However, a drop toward 3% is likely necessary to significantly boost mortgage demand.
The 95% loan-to-value segment is critical to the UK housing market, particularly in terms of sentiment and house prices. Mortgage supply in this segment has improved as rates ease from their 2023 highs, with the UK government’s Mortgage Guarantee Scheme extended to June 2025.
NatWest has made the largest rate cut in the 95% LTV segment, slashing its offer by 50bps, while Metro Bank raised its rate by 20bps, now offering the highest rate at 6.49%. Halifax offers the lowest rate at 5.47%, followed by Lloyds at 5.55%. Yorkshire Building Society is the only lender with a two-year 95% LTV rate above 6%, down from nearly half of all lenders in June.
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