Prices for many home loan products have fallen since July, amid speculation the Bank of England (BoE) might trim its 5.25 per cent base interest rate earlier than expected as a result of supportive economic data, including a slowdown in inflation.
But the New Year has heralded eye-catching drops in key mortgage rates, prompting some analysts to question whether banks can still meet forecasts for net interest margin (NIM), a closely-watched measure of how much they make from lending.
Analysts at Bank of America (BofA) on Friday cut their earnings estimates for 2024 for UK banks by between 7-12 per cent, citing sharp falls in market interest rate expectations that will pressure banks' profit margins.
Competition among banks for mortgage business and deposits is ramping up simultaneously, casting a pall over potential returns for bank shareholders, analysts said.
"We have probably reached peak profitability for most UK banks in H1 2023," Laurie Mayers, Associate Managing Director at Moody's Investors Service, told Reuters, pointing to assumptions of increased pressure on both mortgage and deposit margins.
Banks have already signalled that the boost to profits from central bank interest rate hikes, which began in 2022 after years of near-zero rates, may be waning.
But lenders are striving to maintain market share and many have been able to offer better rates because they can raise cheaper funding in the wholesale market, said Mike Read, director at broker Prospect Tree Mortgages.
Best buys are all now cheaper than at the same time last year, Moneyfacts data shows, with five-year loans below 4 per cent, compared to a best available rate of 4.39 per cent at the start of 2023.
HSBC on Thursday announced a 3.94 per cent five-year fixed rate remortgage deal, and slashed 1 per cent off its 10-year fixed rate loan to 3.99 per cent. Rates on these products are below 4 per cent for the first time since April 2023.
NatWest on Thursday informed brokers of rate reductions to many of its mortgages with effect from Friday, including cuts of 0.42 and 0.3 percentage points respectively on selected 2 and 5 year deals for house buyers.
Earlier this week, Halifax, part of Lloyds Banking Group (LLOY.L), Britain's biggest mortgage lender, slashed between 0.83 and 0.4 percentage points off its top two-year and five-year remortgages, after three sets of price adjustments across its product range in December.
"The level of competition between lenders has been further heightened by the stall in mortgage transactions which has left them fighting for both new and retained business," Karen Noye, mortgage expert at Quilter, told Reuters.
Shares in Virgin Money and Barclays, which the BofA analysts said may struggle more in this environment, fell 2 per cent and 1.35 per cent respectively on Friday, underperforming the benchmark FTSE index which was down 0.9 per cent.
NatWest and Lloyds, which the BofA analysts said should be more resilient, fell 0.5 per cent and 1.3 per cent respectively.
UK mortgage price war set to cheer borrowers, pinch bank profits
FE Team | Published: January 07, 2024 21:05:23
UK mortgage price war set to cheer borrowers, pinch bank profits
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