LONDON, Jan 15 (Reuters) - British banks are facing decreased profit margins and increased risks in the UK mortgage market due to stress in sterling money markets extending into a second week. Despite concerns about higher funding costs, banks are showing a strong appetite for lending.
The surge in the cost of hedging mortgage lending through swaps to multi-decade highs has raised worries about Britain's ability to comply with its fiscal rules. Amid investors demanding higher returns for UK sovereign debt, major banks are currently absorbing higher costs without passing them immediately to customers applying for home loans.
In a competitive mortgage market, banks are willing to accept lower asset margins and wider liability margins on loans to maintain high levels of activity. Leading institutions such as Lloyds Banking Group, NatWest, HSBC, Barclays, and Nationwide are vying for a larger share of the mortgage market in the UK.
House prices in Britain rose for the first time since March, with a 3.3% increase at the end of the year, below the 4.2% predicted by economists. Despite potential market stimulation from price drops, borrowers remain concerned about possible mortgage debt cost increases.
Analysts anticipate heightened remortgage activity in 2025, as millions of borrowers are set to transition off fixed deals. Swaps are being used by banks to manage mortgage lending risks, with two-year and five-year swap prices hitting highs not seen in years.
Recent developments in inflation and monetary policy have provided some relief to mortgage lenders competing for business amidst rising costs. HSBC has adjusted its mortgage rates downwards for existing customers and is committed to maintaining competitive pricing.