A lender's race to the bottom on rates

Words by Peter Stimson , Head of Product, Pricing and Proposition

This article first appeared on our blog

As most of us in the mortgage industry are more than aware, things have been a bit tough in the last few weeks. For those of us a bit longer in the tooth, like me, who have been through a few cycles of lending, the last few weeks have been a bit bizarre. It’s not that lenders have been lending with very thin margins (this is "normal" when cases are thin on the ground or lenders want to build pipeline for a new year), but they’ve actually been lending with literally no margins at all, or, in many cases, returns significantly below swaps.

To show the extent of this, we’ve mapped out the weighted average rate of the top 6 lenders at 60%, 75% and 85% LtV for both 2- and 5-years fixed from the 1st of January, until the start of this week, on £999 purchase products. We’ve then compared this against the corresponding SONIA swap rate to see the relative margins through time.

So, what did we find?

Well, if you look at the start of the year for both 2- and 5-year (ignoring the anomaly at the start of January as lenders reset pricing after Christmas), we have a very close spread between margins and swaps – naturally widening with LTV, given the higher capital requirements here. There is then, albeit with a few bumps, a fairly consistent spread between WA lender margins and swaps. For example, on both 2- and 5-year 60% LTV, lenders are circa 20bps above swaps, and at 85% this widens by around another 30bps. However, this starts to shift in the second week of October where swaps start to rise in anticipation of the budget, but lenders maintain, and in some instances even cut, their pricing.         

Whilst there can often be a lag of around a week for lenders to react to higher swap rates, five weeks maintaining rates that are often sub swap is clearly a choice taken by lenders to try and gain, or rather not lose, market share relative to peers. Not only have we seen 2- and 5-year rates sub swap for a very long period, but we’ve also seen 75% lending under the swap curve and considerable margin erosion at 85% and also 90% (although we didn’t model this!) 

Where do we go from here?

We’ve had a major round of re-pricing in the last week by the top 6 plus a few others. It was kind of inevitable that once one went up the others would follow suit, given that they almost felt there was no longer a requirement to maintain position.

Short term, we may well still see some larger lenders still adjust their pricing given we feel some margins are still very tight despite the rises. There is still a lot of uncertainty in the swaps markets with rates still edging upwards in the last couple of weeks although competitive pressures will ensure consumers will get the best deals possible.

Peter's analysis

2-year rate trends

5-year rate trends