The key chart
The key message
The Bank of England’s latest “Money and Credit” release (4 January 2021) provides three positive data points for UK mortgage providers. First, households borrowed £5.7bn secured on their homes in November 2020, the highest level since March 2016. Second, mortgage approvals are at their highest level (105,000) since August 2017, suggesting positive future lending trends. Third, the effective rate on new mortgages increased a further 5bp in November to 1.83%, up from August’s low of 1.72%.
That said, mortgage demand remains very subdued in relation to historic trends and rates on new lending continue to act as a drag on revenues generated from outstanding mortgage balances.
As noted, back in October and December 2020, this is no time for mortgage providers to relax despite these positive developments. The winners in 2021 and beyond will be those providers who accelerate digitalisation across operations, sales and finance and risk to differentiate themselves and improve the experience for their members.
Six charts that matter
UK households borrowed £5.7bn secured on their homes in November 2020, the highest level of monthly borrowing since March 2016. November’s monthly flow compares with average monthly borrowings of £4bn in 2019 and £2.7bn in 1H2020. The YoY growth rate in mortgages rebounded slightly to 2.9%, above the recent lows of 2.7% YoY recorded in August and October 2020.
Mortgage approvals in November – an indicator for future lending – hit the highest level since August 2007. Approvals for house purchases increased to 105,000 from 98,300 in October and the 2020 low of 9,349 in May. In its commentary, the Bank of England noted that, “recent strength in approvals has almost fully offset the significant weakness earlier in the year.”
The effective rate on new mortgages (the actual interest rate paid) increased a further 5bp in November to 1.83%, up from August’s low of 1.72%. This rate is, however, still down 4bp YoY and 5bp YTD. The rate on the outstanding stock of mortgages was slightly lower at 2.11% in November (a new low).
Resilient mortgage demand is the one bright spot in an otherwise gloomy UK retail lending market. Total lending to individuals grew by only 1.6% YoY, despite the 2.9% growth in mortgage lending. The annual growth rate in consumer credit fell to -6.7% in November, another series low. Since the beginning of March, UK consumers have repaid over £17bn in consumer credit.
That said, current mortgage demand remains very subdued in relation to past cycles (see graph above). Real YoY growth rate in mortgage has averaged only 2.2% YoY during 2020. This compares with an average real growth rate in excess of 9% YoY between November 2000 and November 2008.
The 28bp gap between the effective rate on new mortgage lending (1.83%) and the effective rate on the outstanding stock of mortgages (2.11%) is relatively narrow in relation to recent trends but on-going pressure on NIMs and revenue growth remains a key challenge for the sector.
Conclusion
As noted, back in October and December 2020, however, this is no time for mortgage providers to relax despite the positive developments noted above. The winners in 2021 and beyond will be those providers who accelerate digitalisation across operations, sales and finance and risk to differentiate themselves and improve the experience for their members.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.