Research conducted for IMLA in July revealed that over 75% of mortgage advisers regarded niche mortgage products as an important element of their business. Nearly half regarded niche products as very important, yet what most regard as niche hardly existed five years ago. So where is the market going?
At the heart of the niche market is one issue ‘ over supply in the mortgage finance industry. As soon as the housing market showed signs of recovery from the 90s recession, it became clear there were too many lenders chasing too few consumers.
To attract new customers, lenders were willing to pay a premium. This premium came in many guises ‘ cashback, discounted variable rates, discounted fixed rates, mixtures of all these and many others.
Lenders responded to these difficult trading conditions in a different manner ‘ innovation rather than price cutting. These lenders developed products and markets where price was not the only consideration and where a sensible margin could be earned against a well-balanced risk. It is no coincidence that flexible mortgages, sub-prime and buy-to-let grew up over the same period. The chief architects of these developments were often newer, smaller players in the industry moving fast enough to meet the needs of emerging markets.
The last five years have been good for niche players ‘ their markets have taken off and economic conditions have been good. But the leviathans have jealously eyed their margins. Slowly the mainstream players have moved in ‘ 52 CML lenders now offer flexible products.
So what of the future? The market is clearly polarised and this can only become more pronounced over time. Only the largest lenders will be able to operate successfully in the mainstream market going forward. Regulation can only add pressure to this equation and increased transparency can only result in more selling on price.
The need to constantly reduce costs and operate on thin margins has a price though. Lenders will use streamlined underwriting and processing techniques that allow little individual assessment of risk.
For advisers there is good and bad news. Good because niche customers need niche solutions ‘ for the most part intermediary solutions. Bad because there will be fewer consumers who look to them to place their mortgages as transparency increases and knowledge improves.