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Chilton on mortgages

Talking to lenders over the past few days, they all assert that applications in January were between 40 and 60 per cent below target. This is clear evidence that the market slowdown indicated by data from the Council of Mortgage Lenders and the Bank of England at the end of last year has continued well into this year.

Obviously, a number of lenders are still suffering post-M-Day blues, reflected in the lack of many outstandingly competitive offerings over the last month. I believe the market was expecting lenders to enter 2005 with strongly competitive price-driven product ranges but this has failed to materialise, with Alliance & Leicester as the exception.

At times like these, lenders have got three weapons in their armoury to maintain product volumes – price, credit and innovation. Despite the challenges posed by the lack of first-time buyers, there has been little innovation in product design or market practice – hardly surprising, given the pressures of M-Day and the constraints forced on lenders by KFIs, but nevertheless disappointing. What is a surprise is that the war is being fought on credit. There has been much tinkering at the outer limits of credit, with a more relaxed stance being taken in a number of areas, from income multiples to rental yield cover. Loan-to-value boundaries have expanded slightly in some product areas.

With arrears on the increase, one has to question the sense of some of these relaxations. History has always proven that giving on credit always ends up being more costly than giving on price.

With the exception of Chelsea and Portman, which are both issuing competitive two-year fixed rates, the mainstream market has been remarkably unaggressive from a price perspective. Our market is always most difficult when interest rates are relatively stable. We now have a situation where borrowers are anticipating falls in interest rates and cheaper products. This is leading them back to base-rate trackers rather than fixed rates, yet in this market the expectation of cheaper products can realistically only be met in the short term by bigger discounts from lenders. It is going to be very tight over the coming months.

I remain convinced that the market will rise again.Retention products from lenders are simply not good enough, where available, to prevent remortgaging and this will move the market up. This will be accompanied by limited tranches of aggressively priced products from lenders, possibly subject to limited distribution, as they fall further behind their lending targets and realise that there is nowhere else to go on credit.

Perhaps the most interesting pricing conundrum is the battle being fought over the borderline between prime and adverse. As buy-to-let margins reduce, this is the area where margin-hungry lenders are naturally turning their attention. The pressure is coming from both sides, with more prime lenders creeping into the sector, while many of the traditional adverse lenders are moving into near-prime. This is leading to pretty intense price competition across the boundary. There will inevitably be lending casualties as a result of this.

All this means that costs are going to come under intense pressure in the industry. The winners, both in lending and distribution, will be those who are operating off efficient low-cost bases and are able to innovate.

I believe that 2005 will be dominated by pure rate-led remortgaging and the emergence of better approaches for the first-time buyer. We could leave a chasm, both socially and economically, if the lending industry leaves it to the Government with more half-baked solutions in this area.

Mark Chilton is chief executive of Purely Mortgages

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