Pricing Models in the UK Mortgage Market

Introduction

Lenders have depended upon short-term pricing models over the last few years as they have concentrated on customer acquisition. However, such models have meant that lenders are continuing to suffer from diminishing margins. As a result, lenders are taking a new interest in retention, which is being reflected in a change to pricing models. But to what extent will the market change?

Scope

• Discusses the key pricing models currently used by lenders in the market.
• Gives insight into how the market is changing and which lenders are changing their pricing strategies.
• Provides an understanding of the challenges lenders face in regards to pricing.
• Incorporates primary interviews from industry experts and secondary data from a wide range of sources.

Highlights

The majority of lenders continue to use short-term pricing to acquire customers. Offering low headline rates has led to low margins. To recoup these costs, lenders have continued to raise arrangement and exit fees, which have brought about regulatory and media concern.

Lenders are turning to tracker products in order to support retention. Indeed, more lenders are moving away from SVRs by reverting to a tracker rate after a product's discount rate period ends. In fact, Alliance & Leicester now has a higher proportion of its lending in tracker related products than in SVR related products.

Long-term fixed rate mortgages have also seen a rise in popularity. Indeed, a number of lenders started offering such deals in 2006, including Woolwich, the Skipton Building Society, First Direct, and Stroud & Swindon BS.

Reasons to Purchase

• Identify the pricing strategies that are being successful, both in the short and long-term.
• Gain an understanding of how the market is changing and what this means for lenders.
• In-depth analysis of a number of pricing issues and how lenders are reacting.

• Catalyst
• Summary
• Methodology
  • AnaLYSIS
  • Pricing has continued to become more competitive
  • Net margins on lenders' mortgage books has continued to decrease
  • The majority of lenders continue to use short-term pricing to acquire customers
  • Such a strategy has led to low margins
  • To recoup the cost of low headline rates, lenders have continued to raise arrangement and exit fees
  • However, the FSA has clamped down on rising mortgage exit fees
  • APRs have also attracted criticism
  • Critics argue that APRs are misleading, inconsistent and no longer relevant for the UK mortgagee
  • In fact, there have been suggestions for a replacement of the APR
  • But APRs are likely to remain a part of the UK mortgage scene for some time to come
  • However, changes to longer-term pricing strategies reflect an increasing focus on retention on the part of lenders
  • A significant number of lenders are moving away from SVRs
  • Tracker products in particular are gaining interest and momentum
  • Tracker products are being used as a retention tool
  • Lifetime trackers in particular gained popularity in 2006
  • An increasing number of lenders are offering long-term fixed rate mortgages
  • Early and mid 2006 saw particular interest in such mortgages
  • A number of lenders began offering long-term fixed rate deals
  • Lenders offering the same rates to both new and existing customers are becoming more common
  • Formerly, many lenders refused to offer the same rates to all customers
  • However, nationwide has somewhat changed its tune
  • But an increasing number of lenders are moving towards this model
  • Rewarding long-standing customers with discounts could be another way to improve retention
  • Lenders are turning their focus on intermediary retention, with some offering procuration fees for remortgages
  • Halifax's new retention strategy is likely to change the market
  • Yet, lenders will never completely move away from short-term pricing unless the customer demands it
  • There has been talk of SVRs disappearing
  • Intermediaries have a role to play
  • Ultimately, changes in the market depend on customer demand
  • Yet, lenders could have a greater role in changing the market
• Appendix
  • Definitions
  • Bank of England base rate
  • Capped mortgage
  • Fixed rate mortgage
  • Flexible mortgage
  • Tracker mortgage
  • Variable mortgage
• Further reading
  • European mortgage reports
  • UK mortgage reports
  • UK mortgage briefings
  • Forthcoming mortgage briefings
  • UK Mortgage Market Map 2006
  • Key Features
  • For further information
  • Relevant links
  • Datamonitor's custom research capabilities
  • Ask the analyst
• List of Tables
  • Table 1: Mortgage fees have increased substantially over the last five years, March 2001-March 2006
  • Table 2: In the short-term, ultimately, discounted variable rate mortgages are cheaper than lifetime tracker mortgages, September 2006
• List of Figures
  • Figure 1: The UK Mortgage Market Map 2006 covers a wide range of mortgage sectors
  • Figure 2: Taxonomy of UK Mortgage Market Map 2006
  • Figure 3: Datamonitor's core consulting capabilities