Competition is so fierce that no sooner has a lender moved into an area it has identified as one where there are profits to be had than such as buy to let five years ago, other lenders pile in and start aggressively undercutting existing lenders.
Those lenders already in the market are faced with the choice of reacting by offering cheaper products than the new entrants or ignoring the threat and losing out on business and so it becomes a vicious circle.
Once it reaches the point where there are no more productivity gains to be made or costs to be cut, lenders decide it is time to find another sector with better margins. Currently, sub-prime is attracting the attention of lenders because they can charge higher rates on products compared with the prime market. But, predictably, sub-prime rates are also falling as more lenders come into a market which for years was the domain of Kensington Mortgages.
Lenders have long complained that the prime residential market is an unprofitable place to be. The historically low interest rate environment has been bad enough. On top of this, lenders have had to trim costs constantly and introduce ever lower rates to tempt borrowers. Arrangement fees have been rising as lenders try to increase profits while exit fees have also been going up in an effort to dissuade borrowers from remortgaging elsewhere.
With many lenders unable to make a profit in the prime market, buy to let has been the very obvious answer. The problem is that rates have inevitably tumbled significantly in the past few years so they are no longer at a big premium to the mainstream residential market. This is fantastic news for investors who are spoilt for choice but is not so welcome as far as lenders are concerned. Several lenders are reviewing their buy-to-let ranges due to pressure on profit margins caused by the sector’s recent growth.
The problem with the mortgage industry is that lenders are too short-termist in outlook. Imitation is the greatest form of flattery but it is getting ridiculous when everyone simply copies everyone else.
What is lacking is real innovation. Lenders should look to the example of new providers coming on to the market, which have to be innovative to make an impact and eventually a profit.
Instead of concentrating on rates, lenders should look at lending criteria, loan to value and all the bells and whistles of a mortgage. The market would benefit from far more strategic planning, as lenders take a longer-term view. The message has to be passed on that cheap is not always best. You get what you pay for in life, which is particularly true when it comes to mortgage advice.
Mark Harris is managing director of Savills Private Finance.