Mortgage lending 'to drop 10% by 2007

Mortgage lending in the UK will decline 10% by 2007 as the property market stalls, according to a report published today.

Analysts Datamonitor said the outlook for the next few years will be tough for mortgage lenders. "Lenders will need to devise cost effective strategies in the light of increasingly wafer thin margins, and inject a more innovative approach in order to secure a share of the market," said Edward Ripley, financial services analyst at Datamonitor and author of the report.

Last year carried mixed fortunes for the UK mortgage market. Strong growth in house prices in many regions of the UK in the first six months of 2004 continued to drive average mortgage advances.

Even the rise in interest rates seemed to do little to cool it. However, the market's performance in the last quarter of the year was less impressive, with mortgage lending declining by 15% compared with the same period in 2003, the report found.

Datamonitor forecasts total UK mortgage lending will drop by 10% (from £292bn in 2004 to £264bn) by 2007. Loans for house purchases will decline by 15% to £117bn in 2007, compared to £138bn in 2004.

Recent increments in the base rate will limit rate-based remortgaging and fewer people will look to withdraw equity as house prices slow. Datamonitor predicts that remortgaging will decline by 6% over the next three years to £115bn in 2007.

The majority of lenders in the UK compete on fixed short-term discounted deals to attract customers who then become profitable when they move to a standard variable rate at the end of the discounted period.

However, more and more customers - known as 'serial remortgagers' - are regularly switching lenders to take advantage of cheap discounted offers. "Mortgage churn will remain predominant given lenders willingness to compete aggressively on price," Mr Ripley said.

"However, some lenders will turn their backs on short term price-led acquisition strategies and serial remortgagers and develop selective acquisition processes to prevent future churn."

An increasing number of lenders will offer one rate for both new and existing customers in an effort to retain them, the report predicts.