UK Lenders Struggle to Cope With Demand as Mortgage Costs Soar

UK lenders are pulling mortgage products to avoid being overwhelmed by surging demand from customers seeking to fix their payments amid record rises in home loan rates.

Some borrowers, typically with larger mortgages, are even paying penalties to get out of their existing loans so they can secure lower repayments, according to Tony Davis, head of mortgage products at Metro Bank Plc.

Home sales have fallen sharply

Home sales have fallen sharply in recent months as many workers returned to the office, making a move to the countryside less appealing. Lenders have switched their focus to existing homeowners, 3.1 million of whom are due to see their fixed-rate deals expire either this year or next.

That competition has cut margins, meaning repayments on a new deal are often lower than a homeowner’s existing bills. With inflation soaring to a four-decade high, borrowers are rushing to take advantage of those offers ahead of interest rate increases.

Pulling Products

There are less than 4,400 residential mortgage promducts currently available in the UK, down about 3.5% from the start of the month, according to an analysis by Moneyfacts Group Plc for Bloomberg News. In July last year, more than 4,500 options were available.

Lenders “know that if they are left top of the Best Buy tables they will be inundated,” Andrew Montlake, managing director at mortgage broker Coreco, said. “Those that are deluged may often withdraw all their rates in a certain area in order to give their operations and underwriters time to catch up before they come back into the market again.”

Raising new money

Other providers are pulling products because funding they secured has now been advanced to customers, meaning they have to go back to the markets to raise new money at more expensive levels, according to Kevin Purvey, director of mortgage distribution at Coventry Building Society.

“It is usually the smaller lenders who end up getting more business than they can cope with,” he said.

Santander UK, Bank of Ireland UK and Aldermore are among providers to withdraw at least one of their mortgage products this month, according to Moneyfacts. Aldermore said it’s changed some of its range to “help support our service delivery and to ensure that we’re providing the right level of service to all of our customers.”

Demand is so high that Santander UK has extended the validity of mortgage offers and lengthened its opening hours on weekdays. “We’ve had to be continually reactive to competitor movements, resource management and base rate rises which have led to rapidly changing market conditions,” said Graham Sellar, head of business development and key accounts.

Cost of living crisis

The cost of living crisis and soaring inflation means people on standard variable rates are also refinancing their loans at fixed rates, said Davis at Metro Bank, who said the lender plans to grow its mortgage book through 2023.

Mortgage offers in the UK are typically valid for six months and customers are getting ahead of interest rate increases by seeking approvals for loans five to six months before their deals end, compared with two to three months previously, he said.

“Mortgages have been the only real loan-growth game in town since 2019 (when pricing hit lows). Rising UK rates and house-price froth may curb supply, but along with structural hedges, they remain key to margin and revenue,” according to Jonathan Tyce, senior banks analyst

UK homeowners are more vulnerable to rising borrowing costs because they usually fix for two to five years, compared with as many as 30 years in the US. Bloomberg Economics expects the Bank of England to raise the benchmark lending rate to 1.75% in August and to 2.25% by year end.

The average price of a two-year and five-year fixed rate mortgage has risen by about 0.5% this month to 3.74% and 3.89% respectively, according to Moneyfacts. That’s the most since the financial data provider began compiling the statistics in mid-2007.

Slowing Market

The UK housing market is showing signs of slowing after a stamp duty sales tax holiday, low borrowing costs and a desire for more open space sent values spiraling over the past two years. Rising rents have also made it harder for first-time buyers to save a down payment for a home, damping demand.

In an effort to boost home prices, Prime Minister Boris Johnson said in recent weeks that he was open to the introduction of mortgages for 50 years or more and others that would require almost no deposit. Johnson will step down in September after being ousted by the Conservative party, meaning the future of the policy depends on whether it wins the support of the new prime minister.

Money managers are so far calm about the risks from a slowdown.

Spreads on the safest tranche of prime residential mortgage-backed securities have widened to 65 basis points over the SONIA benchmark rate compared with 30 basis points at the start of the year. The widening reflects similar moves across markets due to volatility since Russia’s invasion of Ukraine.

“Although spreads for UK mortgage-backed bonds have widened in secondary markets, they remain far from the Covid-19 peak,” said Pauline Quirin, a portfolio manager at TwentyFour Asset Management in London. “There hasn’t been any deterioration in mortgage performance so far but the impact of cost of living crisis will probably hit toward the end of the year.”