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Chilton on Mortgages

This year, the end of the first quarter coincided with the traditional benchmark for the housing industry of Easter. So, perhaps, it’s time to look at the overall market to see what trends are developing.

To the forefront of my mind is the way most larger lenders have been behaving. Most industry comment on rates is focused on fixes with market movements dominated by the swap market, in the short term, overreacting to shifts in sentiment about the next Bank of England rate move.

This is disguising something that is more evident in the discount market which is seeing an erosion of discounts on new business products. This has been paralleled by lenders also improving their margin when they reprice fixes.

There are two markers from this. First, the Miles report may be being implemented gradually by lenders. There is strong evidence that their retention programmes are becoming much stronger in a reactive sense. Borrowers approaching lenders at the end of a fixed rate are now being offered new business products. This trend, undoubtedly, has been stimulated by the first six months of this year, featuring the market’s lowest ever two-year fixed-rates ending. But I believe that underneath it lies a realisation by lenders that retention is cheaper than churn. This is noticeable among the majors, whose attention will always be focused on those sectors of the market where they can get the maximum return on capital and perennial discounting appears unattractive to them.

The second product of the margin improvement on new business products is a subtle difference in the way that new product releases are coming out. In the discount market, rather than trying to beat the opposition, by continually watching rates and improving them, the opposite is happening. Many big lenders are monitoring the market and when their competitors reprice, they react by shadowing prices up. This has meant a myriad of product changes this year.

Dominating all of this is HBOS. Halifax’s own product range is simply uncompetitive and I expect to see its market share of gross new lending for the first quarter to be well down on historical levels. Abbey may well beat them and watch Alliance & Leicester which has stood alone of the major lenders in sustaining a highly competitive position majors by being the last to narrow its margins on each occasion.

So where does this go for the intermediary. Some are concerned that the churn which has been the backbone of their business, will disappear. I don’t think they need to be too alarmed. While I can see over the next four or five years this trend gradually diminishing, the appetite for market share, combined with infinite lending capacity in the market sourced from securitisation and the perennial emergence of the mad competitor, will mean that later in the year we will see a resurgence of more attractive product to win market share. Meanwhile, we all need to be fleet of foot to pick up the small tranches of attractive money shot into the market, principally by members of the mutual sector. I am sure that Portman and Chelsea won’t be the only institutions fighting this battle in the second quarter.

With spring here, the housing market is showing signs of resurgence, with most of the new activity coming from home movers. There is pent up moving demand, driven by demographic changes, which is starting to creep back into the system after nine months of, essentially, a dormant market. This isn’t going to be a boom and prices aren’t going to roll up, but more deals are being done at realistic prices.

Perhaps, the one overriding factor is cost consciousness. Everyone in our business from lenders to end-customers are becoming more cost conscious. The winners among the intermediaries will be those that adopt the same stance.

Mark Chilton is chief executive of Purely Mortgages

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