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Nationwide Building Society has suggested that intense mortgage competition and increased spending on digital banking services have led to its profits falling by 19% to £788m for the year to 4 April.
The building society saw a drop in profits despite its net mortgage lending rising to £8.6bn from £5.8bn the previous year. Intense competition has likely led to the fall in mortgage rates year-on-year, which consequently could have affected mortgage lending profits. Along with Nationwide reporting a drop in profits, the competitive mortgage market is one factor that could have contributed to Tesco Bank and the AA leaving the sector altogether.
Competition in the mortgage sector has intensified over the last year, with data from Moneyfacts.co.uk showing that in the past 12 months alone, the number of mortgage products available has increased by 9% from 4,588 in May 2018 to 5,001 in May 2019. As a consequence, the average two-year fixed rate has fallen from 2.51% in May 2018 to 2.47% in May 2019 while the average five-year fixed rate dropped from 2.91% to 2.85%. This fall in mortgage rates happened despite the Bank of England increasing the base rate to 0.75% in August 2018, which would normally see mortgage rates increase.
Moneyfacts.co.uk data also reveals that rates among higher loan-to-value (LTV) tiers have fallen the most over the last year, which could be as a result of mortgage lenders looking to attract first-time buyers. The average rate for a two-year fixed mortgage at 95% LTV decreased from 4.11% in May 2018 to 3.26% this month, while the average rate for a 90% LTV fell from 2.77% to 2.63%. Meanwhile, average two-year fixed rates for lower LTVs increased over the past 12 months – albeit by a very small margin – which suggests that margins are so narrow in this area that rates are at the lowest lenders can afford. The average rate at 75% LTV increased by 0.04% from 2.28% to 2.32%, while the average 60% LTV increased by just 0.02% from 1.88% to 1.90%.
With this intense competition likely contributing to Nationwide Building Society seeing a drop in profits, along with the narrow margins, means it is unlikely that lenders will make further reductions to mortgage rates, and instead may be hoping the Bank of England will opt to increase the base rate further to in turn increase mortgage rates. Borrowers could therefore consider locking their mortgage into a fixed term rate now to protect themselves against possible future rate increases.
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