Virgin Money’s Mortgage Balances Fall: A Brewing Storm in the UK Mortgage Market?

As Virgin Money prepares to merge with Nationwide, its latest financial results reveal a concerning trend: mortgage balances have fallen 2% to £56.6 billion in the first half of the year. This decline is attributed to the rate environment and wider cost-of-living pressures, which have tempered purchase activity. Despite some improvement in market activity levels since January, the mortgage market is facing a perfect storm.

Mortgage rates are on the rise

The bank’s mortgage yields have increased by 83 basis points due to higher interest rates, resulting in a 31% increase in mortgage interest income compared to last year. However, this boost in income is overshadowed by the decline in mortgage balances. The rollout of its premium broker service to 225 mortgage intermediaries, covering around 40% of the bank’s applications, may provide some respite, but it remains to be seen whether this will be enough to offset the decline.

Virgin Money’s overall lending has edged 0.3% higher to £72.7 billion, driven primarily by higher business and unsecured loans. Its pre-tax profit has jumped 18% to £279 million, largely due to lower impairment charges. However, CEO David Duffy has warned of headwinds in the second half of the year, including downward pressure on its net interest margin, which is expected to come in at between 1.90% and 1.95%.

‘Following a good first half, we do expect some headwinds in the second half,’ Duffy said.

The bank also expects pressure from ongoing competition, lower interest rates, and a lower contribution from its credit card portfolio.

Nationwide takeover looms large

Last month, Virgin Money shareholders voted by an 89% majority to accept the £2.9 billion takeover offer from Nationwide, which will create the second-largest mortgage lender in the UK. The Competition and Markets Authority has launched a probe into the takeover, examining whether it will result in a substantial lessening of competition within any market or markets in the UK.

As Virgin Money prepares for its merger, it has deferred certain restructuring activities and does not intend to announce any further share buybacks or dividends. The mortgage market is poised for a shake-up, and it remains to be seen how this will impact borrowers and lenders alike.

Mortgage market uncertainty

In conclusion, Virgin Money’s mortgage balance decline is a worrying trend that may be a sign of things to come. As the mortgage market continues to evolve, it’s essential to keep a close eye on the impact of interest rates, cost-of-living pressures, and market competition. One thing is certain – the UK mortgage market is in for a bumpy ride.