Big battalions turn the screw

Small lenders find themselves between a rock and a hard place as mortgage margins are squeezed, says Clifford German

THE mortgage loans war has switched dramatically from the cashback and discount front to a direct onslaught on smaller lenders who often have the best discount offers, by the bigger battalions, who have cut their standard variable mortgage rates from 8.34 per cent to 7.99 per cent. These rates are effective immediately for new borrowers and by next month for others.

Abbey National set the pace 10 days ago and has been followed by the Halifax, Bristol & West, Britannia, Woolwich, Alliance & Leicester, National & Provincial, the Coventry, Chelsea and Cumberland building societies, the TSB and Barclays Bank, while Nationwide has cut its rate to 7.95 per cent. Together they account for more than half the mortgage market. Critical mass has already been achieved and it is simply a matter of how soon and how far the rest of the remaining lenders go in matching the Abbey initiative.

Some of the smaller lenders who have specialised in deep discount and cashback offers to win business have already been forced to follow suit. Yorkshire Building Society, which offers a 6.1 per cent discount on its standard variable rate for a year, has slashed the standard variable rate itself from 8.44 per cent to 7.99 per cent. The Chelsea has also bitten the bullet and reduced its variable rate while maintaining its 5 per cent cashback offer.

Other deep discounters such as Norwich & Peterborough or the Darlington now face a dilemma over whether to move the goal posts against themselves by cutting the standard variable rate on which their discounts are based, or perhaps reducing the discounts to protect margins.

Fixed rate offers are also coming under pressure. Alliance & Leicester last week added a pounds 300 cashback to its fixed rate mortgages and cut the rates by at least 0.25 per cent across the board. First Mortgage Securities, which offers cut-price mortgages over the phone, has introduced a new fixed rate mortgage at 1 per cent for 12 months or 5.25 per cent for two years and finally at 4.75 per cent until January 1998, while Chase de Vere has come in with a five-year fixed rate of 7.75 per cent with no redemption penalties.

The cuts in mortgage rates unforced by any change in base rates, spells good news to anyone thinking of buying or moving home and to borrowers who simply want to remortgage. It is good news for the hard-pressed Chancellor who can argue that market forces are beginning to cut the cost of borrowing and giving a boost to the depressed housing market.

That in turn will reduce the pressure on him to give any of the extra tax concessions in the Budget that worried Tory backbenchers and estate agents have been pleading for.

It is bad news, however, for borrowers who took out fixed rate mortgages earlier this year when few people would have been willing to bet against a steep rise in interest rates as the Chancellor struggled to cope with inflationary pressures. Many borrowers thought then they were protecting themselves by taking out fixed rate mortgages that now look expensive, and find themselves locked in by the redemption penalties most lenders had begun to introduce.

In January the Halifax was offering two-year fixed rate mortgages at 8.35 per cent. A similar mortgage can now be had for 6.15 per cent. As recently as the end of March the Halifax introduced a five-year fixed rate loan at 9.79 per cent, locking borrowers in until the year 2000. A similar package would cost a borrower 8.85 per cent today.

It is also potentially bad news for investors with money in bank and building society deposits. Lenders are making a virtue of financing cheaper mortgage rates out of profits and maintaining rates to investors. But if turnover does not pick up sufficiently they may well seek to share the pain by reducing interest rates on deposits accounts and Tax Exempt Special Saving Accounts, at a time when many investors are already complaining that the returns are unattractive.

It is possible the Chancellor will soon be able to ease the immediate squeeze on lenders' profits by reducing base rates and with them the cost of the money market funds that provide more than a third of all the money building societies use. But competition could still force them to pass on further reductions and face up to a prolonged squeeze on their margins. That could mean more branch closures, job cuts and emphasis on telephone marketing.

It could be specially tough for the smaller building societies who face a choice between fighting the bigger boys on both fronts by continuing to offer big loss leaders to win new business and simultaneously defending their existing lending business, with the resulting further pressure on margins and profits; or effectively pulling out of the bread and butter mortgage market and concentrating on becoming niche players, closing branches, cutting jobs and concentrating on direct marketing over the phone or through intermediaries.

If the squeeze turns out to be too severe many more small to medium lenders may be forced to seek a merger or a takeover, and they may well find the big lenders are far less willing to mount a painless rescue plan.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Day In a Page

    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee
    World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

    Max Brooks honours Harlem Hellfighters

    The author talks about race, legacy and his Will Smith film option to Tim Walker
    Why the league system no longer measures up

    League system no longer measures up

    Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
    Valentine's Day cards: 5 best online card shops

    Don't leave it to the petrol station: The best online card shops for Valentine's Day

    Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
    Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

    Devil in blue Costa is a reminder of what Liverpool have lost

    The Reds are desperately missing Luis Suarez, says Ian Herbert
    Ashley Giles: 'I'll watch England – but not as a fan'

    Ashley Giles: 'I'll watch England – but not as a fan'

    Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
    Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

    Greece elections

    In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
    Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

    Holocaust Memorial Day

    Nazi victims remembered as spectre of prejudice reappears over Europe
    Fortitude and the Arctic attraction: Our fascination with the last great wilderness

    Magnetic north

    The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness