Our market constantly talks about ‘innovation’ in the mortgage space, but actually when it comes to mortgage products, what innovation are we truly seeing, and what ‘innovation’ do we actually need?
I recall a very sage individual once suggesting that when the market talks about ‘innovation’ what they really tended to mean were lower rates, higher loan to value (LTV) and more flexible criteria, to allow larger numbers of borrowers secure mortgages.
That’s not truly innovation, is it? Which sort of begs the question, do we simply need to look at what is already available and make it work better for today’s market?
For instance, news filtered through recently that Michael Gove was looking at the use of mortgage insurance to help more first-time buyers onto the market. The suggestion being he was looking at the ‘Canadian model’ which requires first-timers who want to take out insurance against them defaulting if they are borrowing more than 80 per cent of the property’s value.
This seemed to suggest that mortgage insurance is somehow alien to the UK market, when it is already utilised, predominantly by building societies, for higher LTV loans in order to mitigate against the risk they see in this space.
Of course, there are key differences here – it’s the lender who pays the insurance premium and that cost becomes part of the overall rate to the customer, rather than the borrower paying a premium themselves.
Risk and rates
However, the benefits of mortgage insurance – as Gove is apparently coming to grips with – is in terms of the risk mitigation, but also in terms of the rates available, which in the current market are often significantly more for those purchasing with smaller deposits.
Use of private mortgage insurance by a wider cross-section of lenders would do exactly that and help drive further competition in the marketplace, which would in turn bring rates down.
Now, it is of course a rather more complicated picture, because ours is an industry which has strict affordability measures in place which means that, while the level of deposit required is still the number one barrier to securing a mortgage, many would-be borrowers fall at the next hurdle which is in meeting the lender’s affordability measures.
I know that many of those who want to buy are already paying more in rent than their mortgage would be, but it’s not really me that needs convincing on finding a solution which allows first-timers to buy with a lower deposit, keeping mortgage payments as low as possible, while at the same time ensuring that lenders can risk-mitigate in order to protect themselves.
There are other options
One of the arguments often used against private mortgage insurance was that it was paid for by the customer and yet protected the lender.
However, apparently Gove is not minded to introduce mandatory insurance for first-timers, but still requires a system to ensure greater levels of high LTV lending at more competitive pricing?
It would seem an opportune moment therefore for him to look at the options that private mortgage insurance, paid for by the lenders, offers him in terms of ramping up product choice in the high LTV market. A market which has improved immeasurably since last spring, but in terms of product choice now still lags behind what was available pre-pandemic.
There are options available here however if Gove does want to intervene, boosting high LTV numbers, which will cut rates, while at the same time providing an insurance against default. He’ll only need to look at what is available right now in order to do this – innovation is not required.