The mortgage monopoly may cost you money

The top five lenders account for 82% of all lending. But who are they? And is it a good thing for borrowers?

The mortgage market has long been dominated by big players, but new figures show that the effects of the credit crunch and its impact on the diversity of the UK mortgage market have been absolutely massive.

The Council of Mortgage Lenders has just released its annual largest lender figures for 2009, which show that the top five lenders accounted for an enormous 82% of outstanding mortgage lending -- this is compared to 64% in 2007.

These mammoth lenders are Lloyds Banking Group, Santander, Nationwide, Barclays, and The Royal Bank of Scotland.

HSBC failed to make the top five this year despite continuing its aggressive policy to grow its mortgage book -- the lender has consistently appeared at the top of the best buy tables for the best part of two years (last year it appeared in the best buy tables 2,200 times) and it increased its market share from 4.1% in 2008 to 4.8% last year. Yet it still only made it into seventh place.

So which are the top 10 lenders in terms of outstanding mortgage balances?

Just outside the top 10 were Yorkshire and Coventry Building Societies with respective mortgage balances of £14.8bn and £14bn.

Of course, this table includes all the existing mortgages held, so it stands to reason that the largest, longstanding lenders would have big fat back books of borrowers.

Perhaps when we look at the largest lenders in terms of gross mortgage lending in 2009, it will tell a completely different story.

Hey big lender!

In fact, it doesn’t. The top five lenders in terms of the amount lent out in 2009 is exactly the same as the list for outstanding balances. Those big boys have a firm old grasp on the UK mortgage market, historically and now more than ever.

There are some changes though. HSBC overtakes Northern Rock to make it into sixth place, and Coventry Building Society reaches eighth.

The largest lender last year (by a mile) was Lloyds Banking Group, which lent £34.7bn, just half the £78bn it lent out in 2008!

Biggest lenders by gross mortgage lending

Does size equal good products?

When you look at the lenders that have had the best buy mortgage products over the last year, and that have been competing hard for business, it doesn’t necessarily match up with those who lent the most.

Of course, there are some lenders that price competitively, and lent large sums too -- HSBC, Yorkshire Building Society and Cooperative Financial Services all come fairly high in these tables (within the top 12) and also dominate the best buy tables.

But some of the lenders offering the best deals in 2009 included some relative tiddlers, including smaller building societies like Market Harborough and larger mutuals like Principality, neither of which made the top 30 by measure of gross lending or outstanding balances.

Of course that’s not to say that the mega lenders offer bad mortgages, as they don’t. At any given time one or more of these lenders will have a few great products in their vast ranges. But (in my humble opinion) the top five could be pretty readily beaten in most product areas at most loan-to-value ratios in 2009. And still can.

So why did they lend so much?

Big shiny brands

Of course, a big brand is a huge asset and the millions spent on advertising and marketing by the top five lenders means they are ingrained in our heads when we think about mortgages. Many borrowers turn to the big names they feel they can trust. After all, a mortgage is a pretty big deal.

Secondly, the big five lenders also have a huge high street presence, and many borrowers will already have a current account with them. You may already receive marketing about their mortgages in the post and could even qualify for special loyalty rates.

But there is another reason that the biggest lenders are lending more, and it is indicative of a change in the mortgage market.

Market domination

Lenders have been through the mill since 2007 and the entire sector has completely changed. Gross lending last year was £144bn, less than half the amount in 2007 (£363bn).

Many lenders simply don’t have the funds to lend. The wholesale funding markets nearly collapsed during the credit crunch, and are still not fully functioning, so lenders are having to rely on retail deposits (our savings) to fund a larger portion of their lending.

This explains why the biggest banks and building societies lend more. They can attract more retail deposits giving them deeper pockets. Many lenders don’t even take retail deposits -- they are just lenders, not banks. When the wholesale funding markets dried up, their sole source of funding disappeared.

Unfortunately, this isn’t set to change in the foreseeable future, as the large lenders increase their market share and the minnows lend the limited funds they have.

In fact, regulation is tightening in the mortgage market, and the new rules could give the biggest lenders even more of an advantage.

What this means for you is that your choices will become more restricted as a smaller number of lenders lend a greater number of mortgages.

It’s not that other lenders aren’t offering great products -- they are. But when the smaller lenders launch a best buy deal they will have a pretty limited tranche of funding for it, so it’s essential you act quickly to be in with a chance of getting it.

In fact, why not start now, by searching for the best current mortgages with lovemoney.com’s innovative mortgage search tool?

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