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Mortgage spreads “cannot go much lower”: Imla

Changes in capital requirements for lenders may lead to mortgage spreads widening in the next quarter, according to the Intermediary Mortgage Lenders Association.

The comment from executive director Kate Davies follows the publication of the Bank of England’s quarterly survey of credit conditions for UK banks and building societies.

The report reveals that secured credit to households increased slightly in the first quarter of 2019 and will likely follow a similar story during Q2. It adds that demand for such lending for house purchases was unchanged and is expected to decrease during the same time frame.

In terms of remortgaging, however, the BoE says that demand increased “significantly” in Q1 and is expected to increase further in the next three months of the year.

Regarding loan pricing, the BoE reports that spreads remained unchanged in Q1 but “were expected to widen in Q2”.

“The mortgage market is currently highly competitive: tighter affordability requirements, coupled with Brexit effects on borrower confidence and a subdued buy-to-let market, has spurred lenders to move into the higher LTV space and to explore specialist areas such as later-life borrowing or the self-employed,” comments Davies.

“Lenders are likely to be cautious, however, in terms of going up the risk curve: the loans that have been advanced at higher LTVs over the past five years show exceptionally low arrears by historical standards, and this is welcome,” she adds.

Indeed, the report shows that secured loan default rates were unchanged in Q1 and are expected to remain so in Q2.

Davies continues: “Consumers have been able to benefit from the market competition and the resulting reduction in mortgage spreads, particular on higher LTV products. But, as our recent ‘New Normal’ report identified, with lenders having to hold more capital against mortgages as a result of the changes to the Basel regime, it may be that mortgage spreads cannot go much lower.

“The market is likely to continue to be challenging in terms of the volumes of business that can be written at sustainable margins. Lenders will no doubt develop new and innovative products to meet consumers’ needs, but must do so within the inevitable constraints of the regulatory and prudential framework,” Davies concludes.

However, SPF Private Clients chief executive Mark Harris disagrees in some respects: “While the Bank of England reports that overall spreads on secured lending to households relative to bank rate or swaps remained unchanged in the first quarter but are expected to widen in the second quarter, we are not so convinced.

“With supply outstripping demand, this is keeping a lid on any mortgage rate increases as lenders compete with each other to attract business. The market is ultra competitive and because of this we expect pricing to remain where it is, with lenders continuing to accept tight margins,” he says.

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