How challenger banks are changing the mortgage market

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Challenger banks are increasing competition in the mortgage market but failing to dent the market share of their high street rivals.

Earlier this week, the FTSE Group conducted its quarterly review of the 250 index to decide which companies should enter and which companies should drop out.

Following the review, Aldermore, Shawbrook Bank and One Savings Bank have broken into the FTSE 250, valued at £985m, £947m and £789m respectively.

The three challenger banks will be formally added to the index on 19 June.

They are also pushing down mortgage rates, but argue they are not pitting themselves against the biggest lenders.

Shawbrook Bank managing director of commercial mortgages Stephen Johnson says: “Challenger banks have increased competition and widened the choice of products available to consumers.

“But the term challenger bank covers a range of different lenders. Some are trying to take market share, while others are targeting specialist segments of the market.”

Shawbrook offers buy-to-let, commercial mortgages and secured loans. Other challenger banks offer a mix of residential and buy-to-let lending, such as Virgin Money, Metro Bank, TSB, Aldermore and One Savings Bank.

Metro Bank says it expects to become one of the top 10 lenders in the next few years, although it did not disclose lending figures in its 2014 accounts.

TSB says its market share currently puts it in the top 10, but declined to give a figure. In the second half of last year it lent £802.3m; full-year results are not available as it is a relatively new lender having launched in 2013.

Aldermore and Virgin Money, meanwhile, are struggling to increase their market shares.

Virgin Money lent £5.6bn in 2013, equating to a 3.2 per cent market share and making it the ninth largest lender.

The bank lent £5.8bn last year, leading its market share to slip to 2.8 per cent as total gross lending rose 17 per cent year-on-year.

Aldermore lent £900m in 2013, equivalent to a 0.5 per cent market share. Last year it increased lending to £1.1bn, but its market share remained at 0.5 per cent.

Meanwhile the UK’s biggest mortgage lender Lloyds Banking Group lent £40bn last year, achieving a market share of 19.5 per cent, down slightly from a share of 20.2 per cent in 2013.

Santander increased its share from 10.4 per cent in 2013 to 12.8 per cent last year.

Aldermore managing director for mortgages and commercial lending Charles Haresnape says: “The market has grown and we have increased our lending significantly in line with that, so we are happy for our market share to stay the same.

“We aim to increase our lending year-on-year, and while the high street banks’ share is likely to fall slightly over the next few years, their slice of the market is so large I don’t expect it to change massively.”

He adds: “We definitely do not see ourselves competing with the likes of Halifax.

“Our target market is prime borrowers who struggle to get deals with the high street lenders because they don’t fit their credit score card approach.”

John Charcol senior technical manager Ray Boulger says: “Aldermore is not really taking business from the mainstream market. Its criteria are good for people who have a good credit record but do not have a perfect credit report.”

One Savings Bank also says it is not competing with the high street giants.

The bank lent £1.2bn in buy-to-let loans last year, and £286m in residential mortgages.

One Savings Bank sales and marketing director John Eastgate says: “We think of ourselves as more of a specialist lender than a challenger bank; we are providing a service to markets that are not well served by mainstream lenders.”

He says the bank’s typical borrowers are large portfolio landlords, and on the residential side, high-net-worth individuals such as company directors.

But while challenger banks may be struggling to dent the market share of the top lenders, experts say they have significantly increased competition.

London & Country associate director of communications David Hollingworth says: “TSB has come in with some market leading rates, while Metro Bank competes on a balance of rates and service.

“With more brands fighting for business, that sharpens up the larger lenders and is one of the reasons rates are so low.”

A spokeswoman for Moneyfacts says: “Challenger brands cannot necessarily compete on rate but often offer a better overall deal with lower fees and incentives. They are filling the void banks would be wary to tread by focusing on higher loan-to-values and larger loans.”