Challenges for UK Lenders

Mortgage lending in the UK will decline 10% over the next three years as the housing market and house price growth stalls, according to the latest from Datamonitor. Among other trends, the independent analyst says 'serial remortgagers' are exploiting lenders' habit of attracting customers with short-term fixed rates.

In addition to a slowing market, UK Mortgages 2004 says the UK's mortgage industry faces new challenges brought about by the reshaping of the distribution landscape and a more competitive market. Report author and Financial Services Analyst Edward Ripley says increasingly 'wafer thin margins' will force lenders to 'devise cost effective strategies and inject a more innovative approach in order to secure a share of the market'.

Datamonitor says the year 2004 started well for the market with even the intervention of the government's Monetary Policy Committee unable to stop strong growth in house prices from driving up average mortgage advances. However, in the last quarter mortgage lending declined by 15% in comparison with the same period in 2003.

The report forecasts that total UK mortgage lending will fall 10% by 2007 (to £264bn from £292bn in 2004) and that loans for house purchase will decline by 15% from £138bn in 2004 to £117 billion in 2007, while remortgaging will decline by 6% over the next three years to £115 billion in 2007.

The rise of 'serial remortgagers' is undermining lenders' strategy of bringing in new customers with fixed short-term discounted deals - these customers leave before they become profitable by moving to the lender's standard variable rate (SVR). Figures from MORI FS Consumer Data show 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 in 2004.

Ripley says that mortgage churn will continue but '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'. They may also move back to a flat rate in order to keep existing customers.

The report also discusses challenges posed by new regulation such as disclosure requirements to customers (KFIs), training and competence requirements of advising staff and changes in financial promotion. These have led to changes, among others, in the way in which mortgages are distributed through intermediaries - large networks are 'expected to play an increasingly significant role in the distribution of mortgages and lenders will need to ensure that their products are represented on these channels' according to Ripley.

Datamonitor's home page is at www.datamonitor.com

All articles 2006-23 written and edited by Mel Crowther and/or Nick Thomas, 2024- by Nick Thomas, unless otherwise stated.

• Datamonitor
• All news