In order to safeguard their 50% market share, mortgage advisers must be aware of the reasons clients come to them for advice. Borrowers with standard requirements who are clear about their mortgage choices are generally happy to deal direct with mainstream lenders either through their branches or by telephone or the internet. On the other hand, borrowers who have non-standard requirements, or who need some guidance to understand the unfamiliar process of obtaining a mortgage, make up the bulk of those seeking advice from a mortgage adviser.
For these non-standard applicants, advisers often have to perform a dual role. Their main job is to outline the best mortgage choices open to their clients. However, before they can do this, many advisers need to explain how the specialist mortgage market is served by various lenders, and how the product categories on offer suit the needs of different borrowers.
Applicants with non-standard needs ‘ such as self-certification or buy to let ‘ may believe they can obtain a mortgage quickly and easily from one of the larger high street lenders.
As a result they need to be made aware that these products are normally only available from niche lenders. Applicants with this good background understanding are likely to be most receptive to the recommendations of the adviser.
One of the greatest barriers to overcome in understanding specialist lending is the confusing vocabulary currently in use within the non-standard mortgage market.
As an example of how easy it is to slip into ‘jargon’ mode, terms such as ‘mainstream’, ‘non-standard’ and ‘niche’ have already slipped into this article with no explanation of what they mean.
For those of us who are steeped in the day-to-day activity of mortgage lending, this is not really a problem as we already know ‘niche’, ‘non standard’, and ‘non conforming’ mean roughly the same.
However, mortgage applicants cannot be expected to be familiar with these terms and they need to be given some sympathetic guidance in understanding them.
So how can mortgage advisers explain to applicants the different sorts of lenders in the mortgage market, and the range of mortgage products and terms that match their requirements?
A useful way to break down the subject so it is easy to understand and absorb is to deal with it in terms of different types of lenders, the products they offer and the type of customer they are designed for. This makes four main categories: mainstream lenders; non-standard and non-conforming lenders; lenders in prime niches; and lenders in sub-prime niches.
The mainstream lending sector is the most familiar, with lenders competing largely on interest rates and providing products for applicants with regular earnings, a good credit profile and standard property requirements (for example, they wish to purchase or remortgage their main home).
Mainstream lenders normally require borrowers to provide documentary proof of income, such as payslips for the employed or three years’ accounts for the self-employed. These lenders usually use credit-scoring systems which screen out applicants that do not fit their middle-ground borrower profile. Another term often used to describe these lenders and the products they offer is ‘standard’.
‘Non-standard’ and ‘non-conforming’ lenders offer mortgage products for borrowers who have been declined by mainstream lenders. These borrowers can be lacking documentary proof of income; they may want a loan for non-mainstream purpose (for example, buy to let), or they may have some elements of adverse credit history, for example arrears, county court judgments (CCJs) or a combination of these. Non-standard and non-conforming lenders generally fall into one of two categories: ‘lenders in prime niches’ and ‘lenders in sub-prime niches.’
To understand the first of these lender categories, one needs to know how the terms ‘prime’ and ‘niche’ are used in this context. ‘Prime’ usually describes borrowers who have documentary evidence of a regular income; a good credit history (which is no worse than would be required by a mainstream lender); and a stable living pattern which will include an entry in the electoral roll, a home telephone and so on.
‘Niche’ frequently describes lending or borrowing which cannot be described as ‘mainstream’ or ‘sub prime’ ‘ either because the borrower does not fit the mainstream profile, or because the property in question is non standard, or both. ‘Niche’ is an alternative term for ‘non-conforming.’
Lenders in prime niches are the most likely to offer niche products such as buy to let, rent and buy, remortgaging for capital release, higher income multiples, self-build, and semi-commercial loans (for example business premises with flat attached), expatriate mortgages, equity release, and l00% LTV. These lenders allow applicants to self-certify income. This accommodates the needs of the self-employed who do not have sufficient audited accounts on record, or whose accounts do not fully reflect their total income as well as those employed applicants on short-term contracts, with an irregular income or with income from more than one source.
Prime niche lenders only accept applications from borrowers with a good or satisfactory credit history. This means no CCJs, arrears, or history of bankruptcy. They tend to use a mixture of credit scoring and individual underwriting to assess applicants.
Finally, lenders in ‘sub-prime’ or ‘credit impaired’ niches offer products that cater for borrowers who have a past history of credit problems. These circumstances are also sometimes described as ‘adverse credit.’ Lenders in sub-prime niches tend to offer both standard and niche mortgage products, for example residential mortgaging or remortgaging for those with documentary proof of income as well as income self certification, together with loans for purposes such as buy to let and debt consolidation. Lenders in sub-prime niches charge borrowers interest rates above standard market rates due to the relatively riskier nature of this type of lending.
A couple more terms are commonly applied to mortgage applicants: ‘full status’ and ‘non status.’ ‘Full status’ or ‘status’ are terms used to describe applicants who have full documentary evidence of earnings, for example those with no need to ‘self-certify’ their income. ‘Non status’ describes applicants not required to state or quote their income, but are required to state they can afford the loan.
It is worth noting lenders are also grouped by the way they source the funds they lend to borrowers. Banks and building societies raise funds from their own savers and are therefore sometimes referred to as ‘retail deposit takers.’ Other lenders are owned by larger lending institutions and use funds raised on the money markets to lend to customers. These lenders do not have their own branches and tend to lend through intermediaries. They are often categorised as ‘centralised lenders’.
A third group of lenders, also without branches, are not wholly owned by a bank or building society, and they raise the funds they lend from financial institutions such as merchant banks. This funding is sometimes termed ‘warehouse funding.’
In addition, all three types of lenders raise ongoing funds to continue lending through ‘loan sales’ (also referred to as ‘asset sales’) and by ‘securitising’ part of their existing mortgage book, for example converting the loan assets into tradable securities.
Funding methods do not automatically dictate the sort of products which lenders offer, but in general, the larger banks and building societies cater for the mainstream borrower, and the smaller, centralised lenders cater for the niche markets.
Mortgage advisers are facing ever-increasing demands to ‘raise their game’ in terms of a more professional approach to the advice they give. However, this must be viewed in a positive light. From the point of view of business development, the smart mortgage adviser will see that initial effort invested in helping clients to understand how the market is segmented will pay dividends over time, both in customer loyalty and increased referral business.
Eddie Smith is director of business development at Verso
Brokers will often need to explain to non-conforming borrowers why their mortgage can not be dealt with by a mainstream lender.
Investing time in explaining the nature of non-conforming lending will help build better client relationships.
Applicants must understand that non-conforming lenders will use different underwriting criteria than mainstream lenders.