Two constants have underpinned opportunities for lending growth since 2007; strong house price inflation and cheap borrowing costs.
However, those dynamics are set to shift, and the combination of increasing interest rates, reduced availability of mortgage products, and the energy crisis are likely to result in more limited access to mortgage credit and reduced affordability.
Together these factors are going to make it especially challenging for first-time buyers, movers and homeowners looking to refinance their current deals. For mortgage volumes to continue to grow, lenders must quickly change tack.
In turn, financial institutions will have to come to terms with how the housing market is dividing, and be prepared to explore more niche lending opportunities and use new tools and insights that will allow them to lend safely within the boundaries of their risk policy.
Since 2007, house price inflation and total net mortgage lending have increased almost exactly in line with one another, rising by 37 per cent. New borrower numbers, however, have fallen by 7.5 per cent over the same period. This decline has occurred in 11 of the last 14 years since the global financial crisis and is a trend we’d expect to continue. The result is that more debt has become concentrated among fewer borrowers. But, as the drivers of mortgage lending shift, lenders need a different approach and must stay ahead of the curve.
Avoiding valuation speculation
When it comes to property valuation itself, during any period of uncertainty it is imperative to remain evidence-based and avoid speculation; which could lead to unnecessary down valuation, fuelling uncertainty and customer challenges.
That is why at Hometrack, we endeavour to update our valuation models as soon as possible with the latest transaction and valuation data, and as we did during both Covid lockdowns and the last global financial crisis, work very closely with lenders to raise the transparency and frequency of our model and market monitoring.
Reacting to new drivers of mortgage lending
As house price falls become more likely in the coming months, lending growth will depend on the number of transactions that take place, the volume and profile of new borrowers and the level of equity withdrawn for household and home improvement spending as many endeavour to cut back.
We know that there is around £7tr of equity locked up in UK housing, presenting an enormous opportunity for mortgage lenders to react and expand their secured lending book.
To what extent borrowers tap into this vast equity to fund their next property or project will depend on lenders’ willingness to lend in different market segments.
Over the long term, we expect to see more borrowers in the market, but not for new property purchases. Instead, these borrowers will opt to take out smaller loans to carry out DIY projects at home to add space to their property or to fund energy efficiency improvements.
In response to these changing customer needs, product innovation will be a key ingredient in future successful lending strategies and should not be overlooked.
Assessing risk over a property’s lifetime
In challenging market conditions, the volume of transactions and borrowers is set to become the new driver of mortgage lending growth, not inflation. For lenders, they must focus on seeking out different types of borrowers and sectors such as buy-to-let purchases and remortgages, later life lending, new build and high loan-to-value purchases to drive volume.
But doing so exposes lenders to greater risk and a greater reliance on manual assessments as automation is absent in most niche areas of lending. So it may not be as simple as it seems.
To safely take advantage of these lending opportunities, lenders need to be equipped with a new mechanism, such as a property risk score. Just like a credit score for borrowers, a property risk score – which sticks with the property like a passport – would give lenders a near complete picture of the risk a property poses in one place.
Knowing a property’s risk score could tell lenders if it is a liquid asset and indicate if it has any features that might impact pricing in the future.
A score could also accelerate the identification of complicated property issues that often remain hidden until the conveyancing stage. This level of additional information – all of which can be assessed digitally and remotely – could inform lending decisions, assist with growth strategies and even pave the way to risk-based pricing.
In a market that is becoming more complex and segmented, scoring a home – as well as the borrower – is the next natural step in helping lenders to target and secure business while managing risk effectively.
It’s time to use these challenging conditions as an opportunity to move the industry forward with necessary caution.
