HSBC, Barclays, NatWest, and Lloyds are likely to face pressure on their net interest margins (NIM) due to tightening mortgage spreads, as indicated by Bloomberg Intelligence’s new pricing study.
The UK housing market is benefitting from sub-4% swap rates and increasing loan approvals, but reviving the £1.6tn mortgage market will require significant interest rate cuts.
Tomasz Noetzel, Senior Industry Analyst at BI, commented: “Competition in 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% LTV offers have fallen by 50 bps on average to 4.6%, the largest decrease across two-year LTV offers, reversing previous gains this year.”
Indeed, Bloomberg Economics has reported they one more rate cut this year and market-implied rates now point to 130 bps of BOE cuts over the next 12 months that could bring mortgage rates further down.
Margin dynamics between UK banks’ front (new business) vs. back books (stock of mortgages) is likely to remain dilutive to net interest margins for the rest of 2024 and into 2025, according to BI’s analysis. That’s in respect to the new-business completion spread of 70 bps shared by incumbents including Lloyds and NatWest.
Lloyds reported the spread on maturing mortgages coming off balance sheet was about 110 bps, largely explaining the 4-bp hit to Q2 2024 net interest margins. The lender also reiterated that mortgages are its strategic focus, given the economic value, implying an ongoing near-term margin squeeze as the business expands in an increasingly competitive space.
Meanwhile, NatWest reported a lower hit to its margin from mortgages this year (1-2 bps in Q1 and Q2), with its outstanding balance shrinking 1.5% to about £202bn in Q2.
Noetzel added: “The gap between five-years fixed mortgage rates and those for a two-years product at 75% LTV is about 40 bps, 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 50 bps 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 second-highest rate (4.48%) after delivering the smallest cut of 20 bps in the last three months.”
Elevated mortgage costs have disproportionately affected younger Britons — exacerbating the wealth and ownership divide — with stretched affordability a key obstacle to access, says BI. UK mortgages flattened at about £1.6tn in the past two years as high rates curbed demand.
The recent drop in UK two- and five-year swap rates to about 4.1% and sub 3.8%, respectively, reflects expectations for further monetary easing, with a drop toward 3% probably needed to revive the demand for credit.
The UK mortgage market’s 95% loan-to-value bucket is critical to sentiment and house prices, with house-loan supply back to market after mortgage rates continued easing from 2023 highs and the UK government’s Mortgage Guarantee Scheme was extended to June 2025.
Offers decreased by an average 15 bps from June, with NatWest delivering the largest cut of 50 bps and no longer offering the highest rate. Metro Bank is the only lender that increased its rate (up 20 bps), offering the highest 6.49% in our sample.
First Direct, Barclays and Yorkshire Building Society left their offers nearly unchanged from three months ago. Halifax at 5.47% offers the lowest rate followed by Lloyd’s 5.55%.
Currently only Yorkshire Building Society’s two year 95% LTV offer is above 6% vs. nearly half in our sample at the beginning of June.