Low interest rates and an economic slump mean UK bank chief executives have little to get excited about this year. That explains why they appear to see a swell in Britain’s mortgage market as a possible tidal wave of future revenue. The risk for António Horta-Osório and other CEOs is that it’s just a ripple.
The Lloyds Banking Group boss, who is due to step down next year, said on Thursday the lender had received more loan applications from first-time buyers and home movers in the third quarter than at any time since 2008. Lloyds’ open mortgage book expanded by 3.5 billion pounds to almost 271 billion pounds in the three-month period. Horta-Osório echoed rival HSBC in pointing to higher home-loan demand as a factor offsetting the pain from low interest rates.
The evidence supports his point. Lloyds’ net interest income in the third quarter was 3.6% higher than in the previous three months. Brits who saved extra cash during lockdowns seem to be putting it to work in the property market. And extra credit demand has given lenders pricing power. Bank of England data shows the average interest rate on a two-year, fixed-rate mortgage worth 90% of the property’s value was 3.3% in September, up from 2.1% in January.
The surge in demand may be temporary, though. After spending most of the spring cooped up in their homes, people are making up for lost time while taking advantage of a temporary government holiday on property transaction taxes. It’s too early to judge whether a shift to home-working will prompt more Brits to flee cities for spacier country pads, which would further buttress mortgage demand.
Meanwhile, rivals like HSBC, Barclays and Banco Santander could jump back into mortgages with a vengeance next year. Many banks pulled back from the riskier, higher-margin part of the market recently, partly because of the dangers posed by Covid-19 and Britain’s possible departure from the European Union without a trade deal. A smoother Brexit and a virus vaccine could increase competitors’ risk appetites.
Horta-Osório is up on his board and ready to ride the mortgage wave. But it might not be as impressive as he thought.