Britain’s Prudential Regulation Authority (PRA) says it is ‘watching like a hawk’ as a summer mortgage war continues among Britain’s lenders.
PRA chief executive Sam Woods said he was becoming concerned that banks and building societies are offering ever more risky home loans as they try to attract customers ahead of a possible interest rate rise.
Speaking at the Building Societies Association’s 150th birthday conference he raised concerns about increasing loan-to-income multiples as lenders try to compete against one another in a low-rate environment.
Competition in the market has grown so intense that Tesco Bank has just announced it is pulling out entirely and one of its main rivals has warned the pressure is set to continue.
The bank has clamed ‘challenging market conditions’ for its decision to stop offering new loans and look for a buyer for its existing £3.7 billion loan book.
Expert Nicholas Megawe said: “Intense competition — driven particularly by HSBC’s recent efforts to take market share — has pushed down mortgage rates for customers even as lenders’ funding costs have started to rise.
“HSBC pumped money into mortgage lending after new ringfencing regulations forcing banks to separate their UK operations were introduced into law earlier this year.
The change in policy left the Asia-focused lender with tens of billions of pounds in surplus deposits that it could not deploy in the rest of its business.”
Trading conditions are tough with Nationwide – the world’s largest building society and Britain’s biggest mortgage lender – reporting a 3.4% fall in its annual net interest income over the last year.
Chief financial officer Mark Rennison said: “There is little doubt that ringfencing is impacting the sector and our view is that it will continue to affect the market for the next 12 months.”
Paul Lynam, chief executive of Secure Trust, commented: “You have a situation where the ringfenced banks are very well-capitalised, highly liquid and they have nowhere to go to deploy their capital other than in the UK and we are predicting that a whole host of smaller lenders will also exit the UK mortgage market.”
Reinforcing the PRA’s concern, Mr Woods told delegates to the conference about the significance of the UK housing market as the biggest single loan exposure to both banks and building societies as well as the greatest liability for consumers.
He said: He said: “There are a number of areas to which we are paying particularly close attention currently. First, as all borrowers and lenders are well aware, we have seen something of a price war in the mortgage market over the last couple of years.
“This may be good news if you are, for instance, a young supervisor in the PRA looking to buy your first property. But it is less good news if you are a lender concentrated in mortgages, given the impact on net interest margins.
“The response of such lenders has been entirely unsurprising: a material move up the risk curve.
“Now, it may be that these shifts are well within firms’ management capabilities, and they should be well captured by our capital framework.
But we should be watching them like a hawk.”