Britain’s biggest banks are battling for mortgage market share on razor-thin margins even as borrowers rush to remortgage ahead of looming interest rates hikes.
The central bank is expected to lift its base rate to four per cent on Thursday – its first hike in three years – following a sharp resurgence in inflation.
The move will deal a blow to the 2.3m households set to reach the end of their fixed-rate deals in 2027, according to figures from trade body UK Finance.
Lloyds Banking Group forecasts the Bank will hold rates at four per cent throughout 2027 before easing policy in the second half of 2028. Meanwhile, Barclays projects an average rate of 4.25 per cent in 2028 – an upward revision from the 3.75 per cent it pencilled in back in February 2026.
It will leave borrowers whose deals expire over the coming year refinancing onto higher rates for far longer than initially hoped.
Paul Thwaite, chief executive of Natwest, said “more customers [are] bringing forward remortgaging activities… [and] taking a view on their expectations of future interest rates.”
He added that the lender had seen a switch toward two-year fixes throughout the year – a sign borrowers are hedging against near-term pain while betting that cuts will return in the medium term.
“Customers are making very deliberate choices,” Thwaite said.
But the surge in remortgaging has done little to ease margin pressures as intense competition forces lenders to swallow higher costs rather than pass them on.
Banks square off in competitive mortgage market
Natwest posted 0.6 per cent loan growth in retail banking in the third quarter “primarily driven by mortgages,” which added £1.2bn to its balance sheet. But the bank added income growth was “partially offset by lower mortgage margins and deposit mix impact.”
Competition across the sector has intensified as house purchase activity stalls. Mortgage approvals slid to a near three-year low of 53,443 in September, according to Bank of England data, leaving major lenders fighting over a shrinking pool of new business.
But remortgages surged to 42,600 in September, from 34,000 in August, as homeowners scrambled to lock in rates before borrowing costs climbed further.
“The mortgage market is very competitive,” said William Chalmers, chief financial officer at Lloyds.
Chalmers said profit margins were compressed to around 75 basis points above wholesale borrowing costs, a sign lenders were willing to accept thin returns to defend market share.
Analysts at RBC said there was “increasing levels of competition in the UK mortgage and deposit markets.”
The Bank of England is considering a shake-up of mortgage rules introduced in the wake of the financial crisis that constrict lending, according to the Financial Times.
Bank rules dictate lenders must hand out no more than 15 per cent of mortgages to people borrowing more than 4.5 times their income.
Industry has urged the Bank to go further and permit lenders to offer borrowers a mortgage worth up to five times their income before the 15 per cent cap kicks in.
‘Squeeze on household finances’
UK Finance expects this change to unlock some £200bn in extra lending, which could inject fresh momentum into the crowded market. The Bank’s Financial Policy Committee will release its Financial Stability Report later this month, which will serve as a major update for UK banking regulations.
But a potential relaxation of regulation would land as debt service burdens mount. The Office for Budget Responsibility (OBR) projects mortgage repayments will eat up 4.25 per cent of household disposable income by 2031 – the highest proportion since 2009.
“With borrowers continuing to roll off cheaper fixed-rate deals, the squeeze on household finances looks only likely to intensify,” said Richard Pinch, senior director at Broadstone.
“This presents a growing challenge for lenders, who must balance supporting new lending with managing potential deterioration in credit quality across existing mortgage portfolios.”
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