"There is now a palpable feeling that lenders have had to shift their strategies, and simply offering lower rates has started to recede as an approach to attract new borrowers"
Loan markets are highly sensitive to changes to the Bank of England’s base rate. Any adjustments made on Threadneedle Street have far-reaching implications for the lending landscape.
Needless to say, then, the past 18 months have resulted in a significant reconfiguration of the mortgage and specialist finance sectors.
In years gone by, when the base rate resided at historic lows under 1%, lenders had embarked on a ‘race to the bottom’. As part of this race, many lenders’ marketing and sales strategies were built on driving rates as low as they can; in June 2021, for instance, some mortgage lenders were offering interest rates as low as 0.95%.
However, since December 2021, the Bank of England has hiked the base rate from 0.1% to 4.5%. And the central bank looks set to raise rates for the 12th consecutive time on 22nd June to take the base rate to 4.75%.
Naturally, lenders have been forced to raise their rates as well, but it is not just the products that have undergone a period of change in light of the higher rate – the general discourse and marketing approach that lenders have taken have had to evolve as well.
The effect of interest rate hikes on the ‘Race to the Bottom’
Now, the prevailing sense might be that the Bank of England’s hiking cycle would fuel the ‘race to the bottom’.
Indeed, as the base rate goes up, deploying products with the lowest rates possible would seem like an obvious marketing approach for lenders to take, particularly as there are fewer prospective borrowers in the market.
With borrowing costs and inflation both rising rapidly in the last year, demand from borrowers has begun to suffer, while mortgage lending was forecast to fall by 15% in 2023 at the start of this year. Offering low rates would be a natural option for lenders who want to maintain their loan volume.
However, there is now a palpable feeling that lenders have had to shift their strategies, and simply offering lower rates has started to recede as an approach to attracting new borrowers.
As noted, further base rate hikes are on the cards – with inflation remaining sticky, many economists now see the base rate rising above the 5% mark by the end of 2023. Lenders are naturally having to price these forecasts into their products and rates, largely preventing any cut-down rates that have typically characterised the ‘race to the bottom’.
As a result, specialist lenders are no longer focussing on rock-bottom rates as a key attraction to their products; instead, they are promoting the key qualities that set them apart from their competitors.
Focusing on more than rates
As brokers and borrowers will well know, in the current climate, low rates are just one consideration. Other key qualities that must be assessed are a lender’s flexibility, speed and optionality.
In Q1 this year, for example, it was reported that bridging loan transactions surged 68% on Q4 2022 to reach record-breaking levels. Clearly, as uncertainty around interest rates increased, landlords and investors have sought out specialist finance in order to carry out their property investment plans.
Much of this demand can be attributed to the tightening of lending criteria on the high street. For instance, last year HSBC and Nationwide increased the minimum income requirements for mortgages to 4.75 times a borrower’s annual income to at least £50,000 a year.
Therefore, as risk to mainstream lenders and banks has increased in recent months, borrowers with more complex applications or financial histories have been unable to find the finance they need. Brokers have increasingly needed to look to the specialist finance sector for solutions.
Attracting borrowers with a more complete service
This is no surprise. As mainstream providers increasingly pull mortgages and other financial products, specialist lenders are therefore focusing on the factors that matter more to borrowers than a percentage point; namely, flexibility and certainty in an uncertain economic environment.
For instance, specialist lenders which underwrite their loans from day one – thus enabling them to effectively manage even the most complex of cases – can commit to deals that other lenders may initially engage with only to pull out later. In doing so, these lenders can work with brokers and their clients who may have adverse credit histories, intricate financial structures, or properties that are undervalued.
Similarly, for borrowers facing cash flow issues, as inflation continues to diminish spending power, it is important that investors and landlords have the breathing space they need to continue to invest in the UK property market. Specialist lenders can deliver this breathing space, so many have boosted their rolled-up or deferred interest options.
By allowing borrowers to pay interest at the end of a loan term rather than throughout, lenders can help borrowers reduce their monthly outgoings; the longer inflation continues to ravage the economy, the more important this will become.
As the economic landscape continues to evolve at pace, it is probably too early to if higher rates will be a permanent fixture. But one thing is clear: the days of record-low interest rates are already long gone.
So, lenders are looking for new ways in which they can deliver value for brokers and borrowers – prioritising qualities like flexibility, optionality, speed, and the assurance that they will deliver the loans they promise, has become far more important.
