British mortgage rates have experienced significant cuts this week, setting the stage for scrutiny on anticipated bank profit margins. The sector has faced ongoing challenges in meeting

investor expectations, and recent reductions in home loan prices are placing additional pressure on financial forecasts.

Since July, many mortgage products have seen price drops, attributed to speculations of an earlier-than-expected trimming of the Bank of England's 5.25% base interest rate, supported by favorable economic indicators like a slowdown in inflation.

The start of the new year has brought remarkable decreases in vital mortgage rates, leading analysts to question whether banks can maintain projected net interest margins (NIM), a critical measure of their lending profitability.

Additionally, intensified competition among banks for mortgage business and deposits has raised concerns about potential returns for shareholders, complicating the outlook for the sector's profitability.

Laurie Mayers, Associate Managing Director at Moody's Investors Service, believes that the maximum profitability for most UK banks may have been reached in the first half of 2023. This outlook stems from anticipated increased pressures on both mortgage and deposit margins.

While banks have signaled a potential decrease in profits from central bank interest rate hikes that started in 2022, they are striving to retain their share of the UK mortgage market by offering better rates, leveraging cheaper funding opportunities in the wholesale market, according to Mike Read, director at broker Prospect Tree Mortgages.

Prominent banks, such as HSBC and NatWest, have recently announced notable reductions in their mortgage rates, with competitive offerings below 4% and substantial cuts to selected loan products.

Nevertheless, analysts have expressed concerns about the sustainability of profit margins due to potential declines in mortgage margins and the necessity to rely on more expensive funding sources, including retail deposits, as pandemic-era lending support from the Bank of England needs to be repaid by UK banks this year.

Despite political pressures to raise deposit rates, banks may face challenges in maintaining NIM forecasts if they pass on lower rates to mortgage customers without offering decreased rates to savers, potentially squeezing profitability from multiple angles.