Clearly it is vitally important that the regulator’s checks are robust but it is also important that the process is timely and transparent and that self imposed deadlines for approving or denying an application are met. This is not always the case and it would be appropriate for the Treasury Select Committee to require regular updates from the FSA on applications in the pipeline.
One important advantage new lenders have is that they have no legacy issues to deal with, either in terms of pre credit crunch pricing on long term products or a back book written on criteria very different to what applies in today’s market.
On the other hand there are plenty of challenges when launching a new lender.
Getting the balance right in terms of product, pricing and criteria is not easy. Start off with products that are too competitive and service falls over, resulting in many brokers avoiding the lender for a long time. Start off with products that are too uncompetitive and not only will too few applications will be received but the lender may be dismissed as not worth looking at again.
Recent newcomers to the market like Precise and Aldermore, together with ING Direct’s launch into the intermediary market, have been very successful in steering well through this potential minefield. ING entered the market with the same competitive pricing it offered to direct customers but controlled volumes by a slow roll out to selected brokers through Legal & General Mortgage Club and has consistently maintained a good level of service while offering mainstream products.
Precise and Aldermore saw a gap in the market for some niche areas not served well, or at all, by existing players but again rolled their proposition out in a controlled way to enable systems to be tested and volumes controlled. It is much easier to beef up a proposition after launch by tweaking pricing and/or criteria and/or introducing new products than trying to recover from a bad launch. Both lenders should be congratulated on a well planned launch and for offering some niche products.
Castle Trust is likely to adopt similar principles for the forthcoming launch of its equity share mortgage, with a phased roll out through selected brokers. Its mortgage is certainly innovative. It is a 20% second charge equity loan and will be the only second charge mortgage available for purchases. The borrower will have to provide a minimum deposit of 20%, which will make it low risk from Castle Trust’s perspective and with a maximum 60% LTV first charge almost risk free for the first charge lender.
The basic details are that in exchange for 0% interest on the 20% equity loan the borrower gives up 40% of any capital gain and Castle Trust takes 20% of any capital loss.
In effect anyone using this scheme will be trading off an improved current cash flow against giving up part of any capital gain.
The main unknown borrowers will have to take a view on is house prices. For anyone who wants the security of tenure that comes from owning one’s own home but expects house prices to fall or go sideways, such as most economists, this product offers excellent value even if they don’t need a mortgage. It is not for anyone who expects house prices, or more particularly their house price, to rise sharply.
