Exiting Mortgages - Subnormal Profits

What is happening in the UK mortgage market? Rarely a day goes by without news of another mortgage lender reassessing the risk of their housing loans and deciding to pull the plug on some of their mortgage products. Following on from the Northern Rock which has virtually stopped lending at all and wants to shift a sizeable portion of its mortgage book onto others. The Co-operative Bank, Lehman Brothers and First Direct have all announced that they are withdrawing two-year fixed rate mortgage products for the time being ans there are rumours that Halifax Bank of Scotland, the UK’s biggest mortgage lender is poised to do likewise.

All of this is one of the direct results of the credit crunch. The lenders are spinning this as a way of providing better service-levels to their existing customers but the reality is that the supply of finance in the wholesale money markets has been badly squeezed and this is now feeding through to the retail market for housing loans. It is costing the mortgage lenders more to borrow funds and their profit margins have been squeezed to a level where sub-normal profits are being made. Little wonder that some of the major players are effectively exiting the market by withdrawing some mortgage products from sale.

What does this mean for aspiring home-buyers?

On the one hand, easy access to cheap two year fixed rate loans looks to be a thing of the past and the average cost of a mortgage has gone up. On the other hand, a scaling down of the range of choices available for new mortgage-buyers and those whose mortgage comes up for renewal actually makes life simpler - the choice can be totally overwhelming and confusing for people who just want a decent mortgage at a fair price. Lenders such as the Co-Op seem to have become the victim of the widespread use of web sites that scan all of the available mortgage products and produce ‘best-buy’ rankings - prompting something of a stampede towards the mortgage products that appear at the top of the league tables. For the moment, some of these top-rates mortgage providers actually want to slip down the rankings for the time being until market conditions stabilise.

The number of mortgage approvals is now falling sharply -a reflection of declining market demand and the squeeze on mortgage lending. The BBC reports today that the mortgage squeeze is likely to get worse in the months ahead based on a regular survey on conditions in the credit industry from the Bank of England.