Blog: Will Rising Funding Costs Change the Lending Landscape?


After more than a decade of historically low interest rates, we find ourselves talking about rising rates again.

For years we have said that the world of low rates could never last forever, and today, with inflation at its highest level in 40 years, it is becoming clear that we have reached that turning point.

However, the pandemic has shown us that we have a resilient mortgage market, and I think that’s another challenge we can meet as we continue to meet the needs of borrowers across the country.

Rising inflation is clearly a major source of concern for many, hampering affordability for borrowers, from first-time buyers to growing families. This also influences the practices of mortgage lenders.

Increases in the base rate and inflation levels have resulted in higher funding costs for lenders. This has in part caused lenders to withdraw products quickly, but in extreme cases we have even seen market volatility and increased funding costs causing some to modify or withdraw their portfolio of offerings altogether.

I understand the challenges faced by lenders, especially those dependent on securitisations, but it is essential that we find ways to avoid this disruption if we are to maintain the confidence of brokers and their clients.

Navigating the ebbs and flows of the lending landscape

For the big lenders, everything looks positive. At the Legal & General Mortgage Club, we saw the loan share of the “top six” lenders increase from 62% at the start of 2021 to 71.6% at the end of April 2022.

This jump has been largely fueled by the ability of these lenders to tap retail deposits, which is ultimately positive as it translates into increased competition and better deals for customers.

However, while better deals are good news on the one hand, these increased loan volumes have caused service issues for advisors and borrowers. This has often resulted in frequent rate changes and product withdrawals, meaning service capacity struggles to keep up with funding capacity. More concentration required here, please.

True specialty lenders have also remained buoyant, with many up more than 25% so far this year as they offer solutions for those who don’t meet the affordability criteria to access premium rates. .

For many consumers, recent events have increased their financial complexity and specialist lenders, as well as advisors, have since capitalized on this area.

For others, the landscape looks less favourable. For lenders who rely on securitization markets to back their capital, the volatility has caused headaches, with some days seeing 0.15% swings in swap rates.

For these lenders, keeping tabs on financing costs is tricky and satisfying lenders is no easy task, not to mention having a smaller pond to fish in as bigger lenders take a bigger cut. . Thus, some lenders prioritized margins over volume and offered a limited range of products, pending the return of more stable periods.

For a few, these challenges revealed certain weaknesses, having been forced to make last-minute revisions to deals nearing completion or reassess their rates and short-term arrangement fees. When the tide goes out it becomes clear who is struggling to keep up and it is not a situation that helps anyone in our market.

Navigating these rate changes and last-minute product withdrawals has put significant pressure on the advice brokers give their clients. Advisors not only have to keep up with all the current changes, but are tasked with providing advice in an ever-changing market, which is understandably frustrating and, at times, extremely difficult. A big thank you to all the advisors who fight for your clients.

A varied and stable credit market benefits everyone

Ultimately, it’s in all of our interests to have a wide range of lenders that meet the varied needs of all customers.

For this to remain a reality, we need to be confident that the lenders on our panel will provide a great home for the clients the advisors bring through the door. To that end, we have enhanced our own due diligence processes for lenders and are actively engaging in conversations with all lenders to understand their current position.

Having a wide and varied range of sound lenders is vitally important to our market and the consumers we serve and having the confidence to recommend them to clients is perhaps even more important. This is essential as the cost of living increases and the financial situation of borrowers becomes increasingly complex. These borrowers need more choice and variety to ensure they can find a solution that fits their new situation.

We see signs that financial markets are starting to calm down and hope that the stability will bring more lenders back into competitive positions.

For advisors, ensuring you have the right technology and research tools to identify suitable lenders is crucial. These tools can help match these more complex cases and ensure that borrowers with a wide range of needs are able to secure a place on the property ladder. Additionally, the business case for adopting technology is hard to argue, as technology both reduces the administrative burden and allows you to focus on what you do best: sharing valuable advice with your clients.

We all have a role to play in ensuring a competitive mortgage market, and it’s imperative that we work together – lenders and brokers – to manage case volumes and deliver to clients.

Kevin Roberts, Director, Legal & General Mortgage Club

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