HSBC, Barclays, NatWest, and Lloyds are likely to face pressure on their net interest margins (NIMs) due to tightening mortgage spreads, a pricing study has suggested.
Research from Bloomberg Intelligence (BI) suggested that the margin dynamics between the new business across banks and their back books would “remain dilutive to net interest margins” for the rest of this year and into 2025.
BI said this was regarding the new business completion spread of 70 basis points (bps) across the likes of Lloyds and NatWest.
The analyst said Lloyds reported that the spread on maturing mortgages coming off its balance sheet was around 110bps, which would explain the 4bps reduction to its Q2 NIMs.
BI said with mortgages being a main focus of the lender’s, the near-term margin squeeze would continue as it seeks to grow business in this competitive market.
NatWest reported a smaller reduction to its margin from mortgages this year, of 1-2bps in Q1 and Q2. Meanwhile, its outstanding balance fell by 1.5% to £202bn.
Tomasz Noetzel, senior industry analyst at BI, said: “Competition in [the] mortgage market is set to intensify as lenders engage in pricing wars to secure lending volumes following monetary easing started by BoE in August.
“Since our June update, two-year 75% loan to value (LTV) offers have fallen by 50bps on average to 4.6%, the largest decrease across two-year LTV offers, reversing previous gains this year.”
Falling mortgage rates
At the same time, Bloomberg Economics has predicted there would be one more base rate cut this year, while market-implied rates suggest 130bps of base rate cuts over the next 12 months – which could drive mortgage rates down further.
Noetzel added: “The gap between five-year fixed mortgage rates and those for a two-year product at 75% LTV is about 40bps, unchanged from the start of June. Banks are willing to reduce prices to attract longer duration mortgages for better visibility on their net interest income.
“The rates came down by 50bps on average from the beginning of June, similar to two-year 75% LTV reductions, with NatWest offering the lowest 3.93% in our sample, followed by Barclays’ 3.95%. Five out of 13 lenders in our sample have offers below 4%.
“Santander UK offers [the] second-highest rate (4.48%) after delivering the smallest cut of 20bps in the last three months.”
Larger drop in swap rates needed to revive mortgage market
BI said the market was benefitting from sub-4% swap rates and a rise in loan approvals, but recovery in the mortgage sector would require “significant interest rate cuts”.
At the time of its report, BI said two-year swap rates had fallen to around 4.1% and five-year swaps to below 3.8%, which reflected expectations for further monetary easing. The firms said reductions closer to 3% might be needed to revive the demand for mortgages.
According to Chatham Financial today, the two-year swap rate is around 3.7% and the five-year is 3.4%.
Smaller cuts at high LTVs
BI said mortgages at 95% LTV were “critical to sentiment and house prices”, but pricing at this tier had only fallen by an average of 15bps since June, with NatWest delivering the largest reduction of 50bps.
Metro Bank was the only lender in BI’s analysis to increase its 95% LTV rate, with a 20bps hike to 6.49%.
At the time of its research, First Direct, Barclays and Yorkshire Building Society had left their 95% LTV deals unchanged since the previous three months.
Halifax had the lowest rate of 5.47%, followed by Lloyds at 5.55%.
Shekina is the deputy editor at Mortgage Solutions and commercial editor at Mortgage Solutions and Specialist Lending Solutions. She has nearly eight years of experience in the B2B publishing market, having previously covered the hospitality, retail, pet, accounting and jewellery sectors.
Shekina has worked for Mortgage Solutions and Specialist Lending Solutions for almost five years. Here, she covers the market’s breaking news stories, engages with professionals in the sector, and oversees any commercially agreed content in partnership with mortgage-related companies.
This includes presenting webinars and hosting roundtable discussions on developing themes in the mortgage sector.
She is an NCTJ-trained journalist and was nominated for the Headline Money Awards Mortgage Journalist of the Year in 2021.
In her spare time, Shekina likes to read, travel, listen to music and socialise with friends.
She currently reports on current events in the mortgage market and liaises with financial clients to produce sponsored content.
Follow her on Twitter at @ShekinaMS
