Lenders’ profits are likely to diminish if the Bank of England base rate hits 0 per cent.
A base rate cut will result in lenders losing out by reducing variable rates for existing mortgage holders whose contracts do not come with caveats that allow the provider not to pass on the base rate cut.
Peter Rogerson, commercial director for mortgages at Virgin Money, says the impact of the base rate cut on lenders profits will depend on the structure of their balance sheet and what they do in response to a reduced base rate.
Mr Rogerson says: “A large proportion of our book is fixed rate, and therefore hedged, or reprices automatically as rates change, which means we are in a good position.”
Moving forward, Lee Travis, head of professional development at the Society of Mortgage Professionals, says another hit future profit margins may take is due to lenders having to offer new mortgages on lower rates to remain competitive.
However, Mr Travis says the good news is that lenders will have the capacity to absorb these losses in profits, or else they would not be as keen to reflect the Bank of England base rate savings to consumers.
Innovation
As interest rates squeeze mortgage lenders even closer together in what is already a highly competitive market, lenders will need to set themselves apart somehow to acquire business and make up for lost profits.
There have already been some really exciting innovations in the mortgage market this year, a great example of which is ‘intergenerational’ mortgages.
According to the Society of Mortgage Professionals’ Mr Travis a reduction in the base rate will only help to keep this trend of innovation going.
He says: “We are also likely to see the launch of new products, such as the recent plethora of 10-year fixed rate mortgages.
“With cheap money available to lenders, they may even venture into longer term fixed rates, especially with the benefit of the term funding scheme made available by Bank of England as part of the most recent economic stimulus package.”
David Copland, director at TMA Mortgage Club, says ultimately a base rate cut should encourage more borrowers including first-time buyers into the market with mortgage rates becoming more attractive than ever before.
Mr Copland says: “We expect remortgages to increase in both the residential and buy-to-let markets as consumers now re-evaluate their current mortgage deal and look to secure themselves a better rate potentially leading to greater savings for borrowers.
However, it isn’t only lenders' profit margins that may change as a result of a 0 per cent base rate.
The prospect of a 0 per cent base rate could cause problems logistically for the mortgage market, warns Jeremy Duncombe, director of the Legal & General Mortgage Club.
One of the main concerns is whether banking technology will cope as UK lenders have never experienced lending in neutral territory, he says.
On the continent, where central banks across Europe have already driven interest rates below zero, Sweden and Spain were forced to resolve technical and legal glitches by redesigning their computer systems, Mr Duncombe notes.
