How borrowers are protecting their mortgages from Brexit – Knight Frank
While the negotiation process is likely to last at least two years, homeowners have been responding already by choosing a variety of methods.
Perhaps the most noticeable has been the move among some borrowers towards protecting themselves for Brexit.
Rather than being tied-in for two years on a deal with the most competitive rate, borrowers are instead opting to pay a slightly higher interest rate on their loan in return for a penalty free deal, giving them the option to switch out of the deal should the macro-economic conditions change.
Other borrowers are taking a different tack in an effort to mitigate the economic uncertainty – by choosing longer-term fixed-rate loans. There has been a shift from two-year fixes to five-year fixes, as customers take advantage of the fact that mortgage rates are unlikely to fall much lower and that the economic turbulence which might be coming will have passed by the time they come to remortgage in 2022.
Rates on the rise
There are still five-year fixed-rate deals available on the market at under 2%, but swap rates are creeping up, and there will be pressure on the Bank of England to raise the base rate as inflation increases, so this may not be the case for long. As such, borrowers are being urged to act quickly if they are considering remortgaging to a longer term fixed-rate deal.
While two and five-year fixed products remain most popular, the gap between five and 10-year rates has now narrowed, and more borrowers are attracted to these longer-term deals which will ensure their repayments remain the same for a decade.
However, it is worth noting that while these deals could make sense for mature buyers who are re-mortgaging, first-time buyers should be warier, as the repayment penalties could be too significant to warrant fixing for such a long time, when they are more likely to need to move within the 10 year period.
Earlier this month Clayton Euro Risk CEO and president Tony Ward warned that a Hard Brexit could seriously damage the UK’s house building capacity.
How to avoid getting caught out by property scamsters
As Mortgage Solutions reported, the pair targeted the home of a deceased woman, before Moorcroft changed her name to the genuine owner’s name, set up Dubai bank accounts in that name, before applying and securing a £1.2m mortgage on the property.
The money made its way to Dubai, was taken out in cash and has not been tracked down since, despite the pair receiving jail terms.
It’s another example of how fraudsters can target all types of properties and its clear an area we at the Conveyancing Association are concerned about. One of our recently published strategic plan’s work streams focuses on enhanced identify verification, increasing certainty and centralising the process, ideally with the Land Registry.
Advisers reading this will be able to help all clients who own property by making them aware of the following measures that can be taken in order to mitigate the risk of a successful fraud being perpetrated.
Keep clients safe
Here are some tips and advice to offer clients:
- Make clients aware they can register for the Property Alert service at HM Land Registry – it’s free and if there is activity on their title, Land Registry will contact the owner. Alerts can be set up on any property so, for example, registering for the service in respect of vulnerable property owners such as the elderly means children can be alerted to activity on the title.
- It’s also possible to register a restriction at Land Registry preventing anyone from selling the property without going through extra identity verification with Land Registry. This should make it harder for fraudsters to sell property they do not own
- Buyers of property should ensure they are not buying from a fake seller – to do this ask their conveyancer if they’ll carry out a check on the seller’s conveyancer’s bank account to ensure it is genuine. There are also products available via Lawyer Checker and others that the seller’s conveyancer can use to check the account given by the seller is actually owned by the person with that name.
- Tell clients to avoid posting on social media any information that would indicate they are moving house and the stage they’re at, as this will prevent fraudsters identifying them as a potential target.
- Also, tell them to avoid communicating on unsecure wi-fi – this will prevent cyber-eavesdroppers from intercepting emails.
Finally, remember this is not the only type of fraud prevalent at the moment; other examples include fraudsters sending emails to homeowners pretending to be from their conveyancer asking them to send money to different bank details which in fact belong to them. Warn your clients that if they receive anything suspicious, for example, emails talking about changed bank details, then they must check with their conveyancer before sending any money. Being aware and double-checking can save a lot of heartache for all concerned.
Beth Rudolf is director of delivery at the Conveyancing Association
The struggles of the self-employed mortgage market
This has prompted increased assessment of how easily they can access the mortgage market.
Roughly 15% of the working population are self-employed and they face a different set of challenges when seeking to buy a property.
“The 4.6 million self-employed people in the UK accept that the nature of their employment precludes them from receiving sick pay and generally results in an exclusion to the redundancy components of certain income protection policies,” says Contractor Financials business development director Luke Somerset.
“The current 2% differential in employed and self-employed NICs hardly makes up for the income risk which these workers accept, but it helps.
“It allows the worker to make provisions, accepting that the day they’re unable to work is the day they stop getting paid, ensuring that savings are in place to ensure that their mortgage is paid no matter what happens to their income,” he adds.
One giant leap
While this lower rate of NICs can help, one of the biggest challenges for self-employed is taking their first step onto the housing ladder.
According to research from Aldermore, two thirds (62%) of self-employed people do not know how they will manage to buy their first home and a third (32%) of recent first-time buyers said they had to give up being self-employed to get a mortgage.
One in eight (12%) added that saving for a deposit was so hard they had to take on a second job to earn extra money.
Clearly these levels of affordability are a concern within the first-time buyer market, but the self-employed are particularly hard hit.
Aldermore commercial director for mortgages Charles McDowell highlights the importance of first-time buyers and the changing economy.
“Low levels of confidence amongst these groups will have ramifications further up the housing chain so it’s imperative that more is done to support both segments of our society, particularly with levels of self-employment continuing to rise in the UK,” he says.
Closing the tax gap
While the threat of increasing NICs has at least been removed for this parliamentary term, it is highly likely the issue will raise its head again in 2020 as there is wide political acceptance that the gap between self-employed and directly-employed tax needs to be closed.
Any future changes could impact lenders’ processes, acknowledges Precise Mortgages managing director Alan Cleary.
“Many lenders already struggle with the interpretation of the self-employed financial accounts and this change would be likely to make underwriting the loan slightly trickier.
“Fortunately, there are a number of mortgage lenders that specialise in lending to the self-employed so their choice of lender is much greater than it was a few years ago,” he says.
Indeed, once self-employed borrowers have scraped together a suitable deposit, it appears the landscape to find a lender has improved considerably, resulting in a much healthier environment than just a few years ago.
Lenders, it appears, are more attuned to the changing economy and evolution of work practices, making finding a loan far easier.
“Those with a long working history, and accounts to support it, have been, and continue to be, fine,” explains SPF Private Clients chief executive Mark Harris.
“Most noticeable has been the increasing willingness of lenders to accept those who perhaps have not been self-employed for long, or contractors who have multiple contracts and/or operate under short-term contracts.
“Furthermore, lenders are willing to look at the most recent year’s accounts or accept those with only one year’s accounts.
“There is no single brush to use here, so depending on how long you’ve been your own boss, how you structure your income, or retain it in the business, there should be a lender out there,” he concludes.
Why going long is often best for borrowers
In 2016, there were just 7,700 repossessions, according to the Council of Mortgage Lenders – the lowest number since 1982. That’s despite the real challenges the white paper outlines, such as the doubling of the ratio of average house prices to earnings in under 20 years, and the lowest rates of house-building in Europe.
A big part of this paradox is explained by interest rates. In 1982, the base rate started the year at over 14%. Today, buyers can actually borrow on a five-year fixed rate term with Tesco Bank at 1.78%.
That sort of deal alone explains why longer-term fixed rates are increasingly important for brokers. There’s a range of tremendously attractive five and even 10-year products out there to appeal to clients.
Lower for longer
Shorter-term, particular two-year, fixed rates remain cheaper, but the margin is shrinking. And, with swap rates rising, demand for longer-terms to lock in those low rates is only going to grow.
Lenders, too, remain keen to offer competitive products in this space as they fight for market share. Rates might not be able to fall any further and remain profitable, but competition could still see new products launched and deals extended to higher loan to values.
With more lenders now paying procuration fees on product transfers, there’s also an element of self-interest in tying borrowers to longer terms.
Demand from borrowers remains high, then, and competition is ensuring good supply – at least for now. That’s reason enough to keep a close eye on this part of the market.
There’s another, too, though: longer-term fixed rates are among the best ways to ensure those repossession numbers stay low.
Despite affordability tests, many borrowers would still struggle if interest rates rose significantly. Long-term fixed rates help guard against that.
Until we can sort out some of the challenges the white paper outlined, they remain among the best tools brokers have to help clients face the future with confidence.
The advice for many has to be: Go long.
Cover versus price: it’s about value – Berkeley Alexander
During his 1992 presidential campaign, Bill Clinton used the slogan, “It’s the economy, stupid”, to drive home the significance of the vital link between fiscal prowess and political success.
What he and his campaigners were highlighting was the fact that people want a balanced economy which seeks to serve the best interests of the majority.
Politically, people come in all shapes and sizes, and successful governments will seek to implement policies that meet the needs of the rich, the poor, and as many people in between as possible.
In financial services we face the same challenge, tailoring the advice and the products we recommend to suit the unique needs of the individuals we seek to serve. In this context too, we strive to serve the majority, but in reality no one product can be all things to all people – and to suggest that would indeed be stupid.
Clients need products that are both appropriate and affordable, products that are as good as they can be for the money available, products that represent value – that’s the real key to success.
When it comes to buying home insurance (as with many things in life) there’s the perception that ‘you get what you pay for’ – the higher the price tag, the better the quality of cover.
Now it is true that many of the comprehensive policies will typically cost more, and in return you may well get lower excesses, higher claim limits, fewer exclusions, and additional levels of protection such as accidental damage. But it’s also true that, on occasion, they include types and levels of cover that are way beyond the requirements of the client.
Let’s be honest here – not everyone believes in, nor perceives the need for, ‘gold standard’ cover, and indeed many people simply can’t afford it. What are the less affluent to do? And what if you, the adviser, are up against a client who uses one of the price-driven comparison sites? You need to be able to ‘fight fire with fire’.
What you need at your fingertips is the widest possible choice of products. You need the ability to match policies to clients, thereby showing your true expertise, and your sensitivity to all aspects of their circumstances. Clients want choice and there’s a suitable product out there for everyone, it’s just not the same one.
In the war of price versus cover, you are the peacemaker, and with so many options to choose from, the customer will be the winner. If you deliver real value every time, they will keep coming back to you. It’s not so stupid really.
Geoff Hall is managing director at Berkeley Alexander
Overseas property: a world of opportunity – Conti Mortgages Overseas
With the pound recently exceeding seven-year highs against the euro, tens of thousands of pounds are being lopped off property prices in the euro zone and buyers, full of fresh optimism, are heading overseas in search of opportunistic bargains.
This, together with historically low mortgage rates and bargain property prices, is creating the perfect storm for overseas property investment. It’s a great time, therefore, to consider the overseas mortgage market as a lucrative new revenue stream.
With buyers’ budgets stretching that much further, a little slice of life overseas could seem even more tempting especially when you compare the cost with overheated parts of the UK market.
According to the most recent figures from Eurostat, the UK had one of the biggest annual rises (10%) in property prices in quarter four of 2014, compared with the previous year. Meanwhile, however, Spain experienced a modest 0.2% increase, France saw a drop of 2%, and prices in Italy were down by 2.9%.
As a result, there are plenty of British buyers who are more willing to explore overseas opportunities in their search for better investment potential. The recent relaxation of pension rules could also lead to more people releasing pent up funds and investing them in a foreign property purchase.
And you may be pleasantly surprised to hear that finance is still available. Quite understandably, overseas lenders have become stricter about whom they lend to over recent years, and they’re now judging each case on its own merits rather than relying on specific criteria. But there’s still a healthy appetite to lend to foreign nationals, especially if buyers have a good deposit to put down.
Many intermediaries have avoided this market simply because they’ve been unsure about how to tap into it. But numerous brokers have become involved as the result of a single client enquiry, and then been surprised at how easy the process is and become more confident about taking on more.
One such intermediary is Kenny Findlay, an IFA at Independent Medical Financial Management in Livingston, Scotland. In the summer of 2014, he got a call out of the blue from an existing client who wanted to purchase a ski property in France. He wasn’t experienced in this market but didn’t want to turn his loyal client away, so decided to consult the specialists.
“To be honest, I wouldn’t have known where to start,” says Findlay. “So enlisting the help of a specialist broker totally took the pressure off. They took care of all the administration, sourced the best deal and managed the process from start to finish. But I still maintained the direct client contact, so managed to get the best of both worlds.
“There was one small hiccup which involved the completion date having to be moved due to a legal ‘cooling off’ period taking us beyond the original entry date. This was not a problem in the end, but it just goes to show how things work very differently in other countries and how you can’t afford to make any costly mistakes by trying to go it alone.
“The process was a lot easier than I expected and I managed to avoid any potential language barriers. I’m not sure that I could actually have secured the mortgage otherwise,” Findlay adds.
“The overseas mortgage market seemed quite daunting at first, but now I would have no hesitation in accepting any future overseas mortgage requests from clients. In fact, I’ve just received another one, so I’ll be progressing that as soon as possible.
“It also means that I can earn valuable commission while getting on with the day job, and there are no complaints from me there.”
Broker Toolbox: Understanding and adopting disclosure requirements
As the saying goes, time is money, and often it can take three or four phone calls just to finally get a chance to speak with the client.
Indeed, in an increasingly technological world in which most of us have a mobile phone, it is still frustratingly difficult to contact clients at times.
Well, if you think it’s bad now my friends, it seems it’s about to get worse.
With March 2016 fast approaching, we’re starting to hear more information from the Financial Conduct Authority about what the Mortgage Credit Directive will entail. One piece of information that has become prominent in the last few weeks surrounds disclosure.
Speaking at the Financial Services Expo in Manchester, FCA mortgage technical specialist Keith Hale suggested that one of the major changes for advisory firms could be around the disclosure of their service scope and the remuneration they receive, suggesting there could be “challenges” for firms particularly around service disclosure which now has to be in a ‘durable medium’.
Here is the sticking point. This service disclosure cannot be provided over the phone, causing major problems for those firms that initially speak to their clients via telephone conversation. The disclosure documents would, instead, have to be provided by email with the firm allowing the client enough time to read and understand the document before continuing with the sales process.
Brokers will have have to email the documents to clients and then arrange further time to call the client back once they’re satisfied they have opened and read the document.
This, of course, makes the process slow and cumbersome. It takes much longer for the client to get the result they want and it takes up more of the broker’s valuable time.
Furthermore, it leads to a certain ambiguity as to when the advice process actually begins. Is it during the opening conversation (i.e. pre-application) or application onwards (pre-fact find)?
Thankfully technology may provide you with some help; for example sending your Initial Disclosure Document (IDD) as an attachment to your “thank you” email when someone applies on your website. When you load enquiries in to your CRM system can it generate an introductory email to potential clients telling them you will be calling and can you attach your IDD?
If you prefer to warm your clients up with a phone call first then you may be stuck with a cumbersome two call process, but given you are very unlikely to be cold calling the two approaches above should help to deal with most scenarios.
Bolting on a disclosure document to a pre-sale email process many firms have had in place for years seems pretty easy. If you don’t currently introduce yourself to clients by email maybe now is the time to look at a process to do so and adding the IDD will be simple in 2016.
Steve Walker is MD of Promise Solutions
Self-employed evidence must be bolstered – Santander
The mortgage landscape is evolving and changes are being made throughout the industry, from MMR to the impending EU Credit Directive in 2016. Most recently, the Financial Conduct Authority (FCA), the Council of Mortgage Lenders (CML) and Her Majesty’s Revenue and Customs (HMRC) reviewed the online documentation that HMRC produces for its self-employed customers looking to apply for a mortgage.
Following a discussion last year between senior mortgage officials, it was felt that mortgage lenders shouldn’t solely depend on tax calculations (SA302s) because the information provided is just a duplicate of what self-employed customers tell HMRC about their incomes. HMRC does not verify the data and customers can simply change the data and details if they want to. Issues were flagged that relying exclusively on tax calculations is effectively self-certification of income and this was a customer conduct and governance control concern for the industry.
In order to paint an accurate picture of a self-employed customer’s income, it was recognised that the Tax Year Overview (TYOs) that HMRC asks customers to complete is also a valuable document. The TYO shows how much tax the customer has paid towards the tax due on the income reported for the tax return. Both documents play an important role in showing the holistic income of a self-employed individual.
Today, self-employed applicants who provide SA302s as evidence of income will also need to provide TYOs for the corresponding tax years to support their application. Some self-employed applicants use an accountant’s certificate as evidence of income, at Santander we have always accepted accountant references from qualified accountants and this will continue.
SA302s and TYO information and the necessary forms can be found online at the HMRC website, applicants will need an online account with HMRC and will then be able to print all documentation from the site.
The majority of lenders (over 75% of the market) have adopted this new approach and now ask for TYOs. To support brokers through this change, we have updated our affordability calculator and evidence requirements guide and have issued communications to brokers.
Graham Sellar is head of business development for mortgages, Santander UK
Are you ready to disclose proc fees from every lender in the market? TMA
At the Financial Services Expo last month, the FCA brought to light the implications of the Mortgage Credit Directive (MCD) on mortgage advisers.
One revelation that few people in the room were aware of was the upcoming requirement post March 2016 to provide clients with details of all potential commission levels advisers could have received on all regulated mortgage contracts that could be offered to the customer, not just on the product applied for.
The implications of this means that you will need to show your customer the proc fee available on every product from every lender on a network’s panel; or, if you are a DA, on every product from every lender available through the mortgage club(s) that you use. The challenge seems greater for DAs, especially if you use more than one mortgage club because you will have to reveal the proc fees for each of the clubs.
The objective of the MCD seems to be to show that your advice is not being biased by the payment you will receive from the lender. By comparing proc fees, in theory the customer has the option not to take the initial advice that you present them with, but to opt for another product or lender where the proc fee is lower. On the other hand, if you have a structure that charges a percentage of the loan and refunds the proc fee to the customer, what happens then? You could have a scenario where the customer opts to take the mortgage with the most attractive fee.
To make it clear, you only need to hand over this information if the client asks for it, but you will have an obligation to tell the client that it’s available and that they can ask for it if they so choose.
An even greater challenge still at the other end of the scale is that in order for an adviser to continue to call themselves ‘independent’, they will have to be entirely fee charging (i.e. no commission is received). They will all also have to access to a product range that is genuinely free of restrictions (i.e. including all lenders and direct deals). This ultimately means that we may also see an end to the word ‘independent’ to describe intermediary services, whether in corporate and/or trading names.
What these new rules may do is dissuade DA advisers from swapping from club-to-club – purely for simplicity, as keeping track of the amount of information that they may need to produce for their customers could be a huge administrative burden for advisers.
Mortgage clubs should be able to support firms with this requirement going forward by communicating up to date information but this small, rather hidden piece of the new regulation could actually change the shape of the adviser market by playing a role in how many and which mortgage clubs DA firms deal with.
Lauren Bagley is marketing manager at TMA
How to think like an underwriter: self-employed applications
Sales director Roger Morris and national sales manager Jamie Pritchard explained to brokers how underwriters consider loans for the self-employed.
Morris and Pritchard gave attendees a whistle stop tour of the biggest differences in the way lenders classify applicants as self-employed, different attitudes towards the number of years’ accounts needed and which figures are used in income calculations.
As brokers will already know, the differences are vast and tricky to navigate. The Principality, for example, says that a 5% shareholding in a firm makes you self-employed, the Newbury is of the opinion that a 40% stake is required. Precise sits somewhere in-between using a 25% shareholding as its marker. But, rather than spending the time talking market criteria, the team gave tips on how brokers can join up the dots of self-employed documents and execute Morris’s mantra, ‘tell the underwriter before they have to ask’.
The vigilant broker will already cross check information supplied on supporting documents against the application form. Here’s a few tips, links and reminders from the Precise team to achieve the ‘right first time’ standard.
The accountant’s name, address and qualification which appear on the accountant’s certificate and/or a covering letter for accounts should be checked against the application form.
The qualification should always be checked to prove its validity. Each accountant body will have a website with a list of its members which is usually free to search so you can vet the accountant before sending off the application.
The search functions are not always easy to find and are sometimes listed at the bottom of the site under useful links. The ACCA is a good example of this and takes several clicks to get through to the member directory but it is something the underwriter will do so it’s worth taking the time.
To verify length of time the applicant has been trading, check Companies House if the applicant owns a limited company or LinkedIn if the applicant is a sole trader.
Check that the directors’ names on the front of the accounts are the ones stated on the application form.
Sense check all documents provided. Typos on headers and footers of official documents, numbers which don’t correctly follow on SA302s or accounts and telephone numbers which are one digit too short are all signals that documents may not be legitimate.
Morris let attendees into a secret – underwriters cannot read accounts. They know which figures they can use to calculate income and will thoroughly cross check directors’ names and company addresses but they don’t, line-by-line, understand profit and loss accounts.
His advice is that if there is an anomaly in the accounts which could affect the mortgage decision but there is a reasonable explanation, get a letter from the accountant to explain it and submit it with the application.
Use free resources
Companies House should be bookmarked as favourite website for brokers dealing with self-employed applicants, it’s an invaluable source of information.
The register will show the date the company was incorporated which can be checked against the start date on the application. There may be inconsistencies which can be explained but the question needs to be asked and documented at the back of the application form.
If the borrower has said they cannot supply three years’ accounts but the firm has been trading for longer than three years, this throws doubt on the integrity of the application.
The listing will tell you the company type, when the last accounts were filed and if the company is still actively trading.
Morris said two of the underwriters’ favourite tools for checking the validity of address details are Google Earth and Street View. Pop the applicant’s company name and address into one of Google’s visual searches to see if they are where and what they are supposed to be. If there is a row of garages showing in place of your applicant’s hairdressing salon, something’s not right. Similarly you can ‘Street View’ the accountant’s address if they have business premises.
Yell.com, used more before the invention of Google’s 3D maps, is a quick way of checking out the applicant’s business. Most are listed, even small traders. Gum Tree is another.
Everyone’s heard of employers checking out future recruits’ Facebook pages to sniff out unruly behaviour but apparently this habit has been adopted by mortgage underwriters now too. Instagram has been used to check out whether an applicant has UK residency. An applicant’s feed which only ever showed them to be out and about in Dubai over a lengthy period proved key in establishing that the applicant had falsely declared to be a UK resident.
LinkedIn allows you to see the applicant’s job history and nature of their employment – but remember if you want to go incognito sign out of your own LinkedIn account first or you’ll be rumbled.