View more on these topics

Vicious circle

One of the downsides for lenders working in arguably the most competitive mortgage industry in the world is that profit margins are constantly shrinking.

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.


Group dynamics

James Salmon says Clerical Medical’s decision to quit group pensions indicates the difficulties of operating in a competitive market where squeezed margins, uncertain profitability and the launch of personal accounts cast a shadow over future business.

Generalist practitioner

Close Ventures managing director Patrick Reeve has a record that is second to none in the venture capital trust sector. All his trusts, which have been in existence for five years or more, have shown profits and his first generalist trust is up by 88 per cent over five years and 156 per cent over 10 years to January 1, 2007.

Are days numbered for IR20?

Tax planning. Simon Hildrey says the decision in the Gaines-Cooper case last year has brought into question the ability of non-residents to rely on the concessions in HMRC guidance.

State of the markets: global growth

In conversation with journalist Alexis Xydias, Artemis Global Growth Fund manager Peter Saacke discusses the state of global markets and how he is positioning his fund. Peter gives his views on the growth potential of US, Europe and emerging markets, each of which is on a different stage of the road to recovery. And with a […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm