Battlefield: Big banks locked in mortgage price war as they scramble to lend
Goldman Sachs has warned that tough banking rules have sparked a mortgage price war that experts say is driving the cheapest home loans on record and pushing house prices up through the roof.
The US investment bank believes that the performance of leading banks is under increasing pressure as they scramble to lend to homebuyers at increasingly lower rates.
The strict “lockdown” rules imposed on banks after the financial crisis were intended to ensure that billions in customer savings could not be funneled into “casino” investment banking operations.
But it has prompted banks to enter the mortgage market – considered low-risk loans – which has forced the interest rates they charge down to generate profits.
The warning comes after banks and building societies launched some of the cheapest mortgage deals on record.
Halifax will launch tomorrow one of the cheapest two-year deals ever at 0.83 percent for borrowers with a 40 percent deposit.
Nationwide last month offered a five-year contract with a rate of 0.99%.
Ray Boulger, mortgage expert at broker John Charcol, said it was “the first time the UK has seen an agreement on five-year fixed-rate mortgages below 1%”.
Rival lenders, including Lloyds Banking Group, Barclays, NatWest and TSB, have followed suit. A bank president told The Mail on Sunday: âRingfencing is fueling house prices because mortgages are so cheap.
“This is another regulatory intervention that generates cheap money, and it makes it even more difficult for first-time buyers to climb the ladder.”
The mortgage price war has already forced Sainsbury’s Bank and Tesco Bank out of the market.
Senior Goldman Sachs analysts lowered their forecast for Lloyds, NatWest, Barclays and Virgin Money shares “to reflect headwinds in UK mortgage pricing.”
Banks have seen Â£ 370bn in customer deposits pouring in since the start of 2020, while loans have only increased by Â£ 100bn, which Goldman says has left a huge pool of savings dormant in banks.
Mortgages account for the bulk of the Â£ 100 billion figure.
Goldman said: “This has resulted in a substantial increase in excess deposits trapped within the limits of the big banks.”
Analysts said: âThis is, in our opinion, the main reason for the drop in mortgage prices. The price drop happened faster than expected.
Andy Golding, Managing Director of OneSavings Bank, a specialist mortgage lender, said, âI think in the core banking market it’s definitely having a downward impact on mortgage prices.
âThe big Main Street banks have to do something with all the boxed money they’re sitting on – and so they’re pumping it into residential mortgages at unusually low rates.
“If this becomes the norm, the Main Street market will become absolutely dominated by Main Street banks, which means the smaller construction companies will not be able to compete at all.”
The new warning will fuel the debate on whether the cantonment rules are fit for purpose.
The Treasury has launched a review led by Keith Skeoch, the former boss of Standard Life Aberdeen, who will report the findings to Chancellor Rishi Sunak early next year.
The Mail on Sunday revealed last month that former Barclays boss Bob Diamond was pushing for an end to the cantonment rules.
It is understood that he hopes to unlock deals in the banking sector for his investment firm Atlas Merchant Capital. But some banking experts believe that the cantonment rules are not the only ones to blame.
A source close to HSBC said the bank pulled out of the mortgage market after being burned down by subprime mortgages during the financial crisis.
He said: “The big strategic shift came when HSBC re-entered the brokerage market in 2015, before ringfencing even took effect.”
Mortgage brokers take the lion’s share of the market, with only a small percentage of loans being distributed directly by banks.
HSBC’s market share in the mortgage market has almost doubled to 10% since 2015.
The biggest banks on the street have said in recent weeks that demand for cheap mortgages is so high they are struggling to keep up – even though the stamp duty holiday started to decline in late June.
William Chalmers, chief financial officer of Lloyds Banking Group, the largest mortgage lender, said the market was becoming “more competitive”. He added that the bank would keep an eye on mortgages to protect profits.