Since mid-2007 the bank base rate (BBR) has only decreased and for the past 77 months there has been no adjustment at all, as the Bank of England keeps interest rates at a record low 0.5%.
Although the BoE Monetary Policy Committee vote in August suppressed hawkish dissent, the quarterly inflation report showed a rising confidence amongst businesses and consumers. Wage growth is picking up; private domestic demand is growing and is deemed to remain robust. All of these set exceptions for the economy to expand this year, making 2016 the likely year for an interest rate rise.
The outlook of higher rates is making both mortgage lenders and mortgage-holders nervous.
According to figures from the British Bankers’ Association homeowner remortgage activity in July rebounded strongly showing lending was up 29% year-on-year. As lenders rapidly update their remortgage interest rates responding to a competitive market and fixed rate loans remain cheap, homeowners are rushing to secure new mortgage deals.
Recent evidence shows that although the BBR is flat, fixed rates have started to increase with both the average two-year fixed rate and five-year fixed rate going up by 60 BPS and 50 BPS respectively (source: Moneyfacts).
Due to the higher cost of acquisition, customer retention and associated pricing are imperative for mortgage lenders to achieve their business objectives. For those lenders that intend to capitalise on current market conditions, offset higher costs for their own funding and be well positioned for the demand surge, now is the best time to prepare for pricing and retention challenges.
As the competition intensifies, lenders ought to have a well-defined portfolio optimisation strategy, which will provide an array of tools and insights allowing them to:
Build an in-depth understanding of unique borrower types based on market and lender’s data.
Improve product pricing and channel strategies by understanding multiple intricacies of customer segments.
Take definitive and timely action when market conditions change, leading to savings in both time and cost.
As the lending boom this summer continues with remortgaging activity leading the way, now might be a good time for lenders to review their pricing strategy.
Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.