The key chart
The key message
The Bank of England’s latest Money and Credit release for October 2020 had three pieces of positive news for UK mortgage providers:
- Mortgage demand remains relatively robust
- Approvals for house purchases are at their highest levels since 2007
- The effective interest rate on new mortgages has risen from its August low
This is no time for providers to relax, however. Current mortgage demand remains very subdued in relation to past cycles (despite the low cost of borrowing) and the pressure on net interest margins and revenue generation continues.
The strategic requirement to accelerate digitalisation across operations, sales, and finance and risk is growing.
“Lenders and brokers that use technology to differentiate and improve the customer experience will be the ones that ultimately come out ahead”
BSA, December 2020
Six charts that matter
In its October 2020, “Money and Credit” release, the Bank of England highlighted relatively robust UK mortgage demand. On a net basis, households borrowed £4.3bn in October, the third highest monthly borrowing total this year (see graph above). Outstanding mortgage balances grew 2.7% YoY in sharp contrast to the new record YoY decline in consumer credit (-5.6%YoY). Overall lending to individuals grew 1.6% YoY. As can be seen from the key chart above, mortgages accounted for £4.3bn out of a total (net) monthly flow of lending to individuals of £3.7bn. A rare bright spot.
Looking forward, mortgage approvals increased from 92,100 in September to 97,500 in October (see graph above). This is the highest level of approvals recorded since September 2007 and represents a 10x increase since May 2020’s low (9,400). High approval rates indicate that demand for mortgage borrowing should remain positive in the coming quarters.
The effective interest rate on new mortgages, which had been falling steadily since the end of 2018, increased to 1.78% in October. This compares with the recent low of 1.72% in August 2020 (see graph above). The effective rate has fallen 18bp YoY, however, and remains a negative drain on the rate on outstanding mortgages which has fallen 27bp YoY to 2.12% in October 2020.
Nonetheless, current mortgage demand remains relatively subdued in relation to past cycles despite the low cost of borrowing. In real terms, mortgage demand is growing at only 2.3% YoY, much slower than the double digit real growth rates seen before the GFC (see chart above). As described in previous posts, a key factor here is that, despite the deleveraging seen since 1Q10, the UK household debt to GDP ratio remains at 85%, the threshold level above which the BIS considers debt to be a drag on future growth (see chart below).
Of on-going concern to mortgage providers, the effective rates on new and outstanding mortgages have fallen 10bp and 24bp YTD respectively. The gap between the rate in outstanding mortgages (which peaked at 55bp in February 2020) is still 34bp, indicating further downward pressure on net interest margins and revenue generation (see graph below).
Conclusion
Despite the positive news noted above, this is not time for mortgage providers to relax. With subdued growth and further margin compression ahead, they need to embrace digitalisation to deliver effective market segmentation/client knowledge, alternative revenue sources, further efficiency gains and more effective liquidity and risk management.
As noted in a blog on the Building Societies’ Association website yesterday (2 December 2020), “Lenders and brokers that use technology to differentiate and improve the customer experience will be the ones that ultimately come out ahead.”
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately