With affordability at the centre of the mortgage transaction, thanks to the Mortgage Market Review, ways to lower the cost of the loan have been explored by lenders.
Sam Woods, deputy governor for prudential regulation and CEO of the PRA, highlighted the practice of increasing loan terms from 25 years to 35 years or longer which resulted in more interest being paid by the borrower and an increased reliance on post-retirement income.
A ‘problem for the future’
On lending into retirement, Woods said: “That should not be a problem if lenders can be confident about the availability of such retirement income, or about the scope for the borrower to downsize and use the sale proceeds to pay off the balance of the loan. But if lenders become too narrowly pre-occupied with the profile of the loan in the first five years, in line with MMR affordability rules, this could store up a problem for the future.”
Seeing a rise in this type of lending, the regulator has updated the Sourcebook to include expectations on lending into retirement.
Woods speech was delivered to the Building Society Association’s annual conference, however, he said his remarks were directed to all mortgage lenders.
A shift in risk appetite
He said the regulator had observed a shift in risk appetites from some firms, including building societies.
The regulator is monitoring the actions of lenders looking for ways to widen the pool of borrowers available to them and increase the size of the loans they can offer.
He added: “We observe that net interest margins at societies are coming under increasing pressure and, although they are still well above levels seen in 2010, the trend seems to have turned downwards.
“Squeezed margins are mainly a function of increased lending competition in core building society markets, both from existing large banks that are rebuilding their market shares, and from new challenger banks that are seeking to carve out their own competitive niches. Squeezed margins at building societies are exacerbated when pitted against the mutual pricing strategy many have adopted to protect members in an era of low rates – and so, building societies seek to source new lending that earns higher than average rates.”
“corporate memories can be shed surprisingly fast”
He urged members not to have short memories and commented that 44 societies were represented at the conference, compared to over 60 in attendance in 2004.
“As survivors, societies here today ought to be well aware of the warning signs, but I’m conscious that corporate memories can be shed surprisingly fast,” said Woods. “So I do want to emphasise that a key part of our supervisory approach is to be alert to emerging risks that may not seem as relevant when you are at the lending coalface as they appear to be when aggregated and analysed on a supervisor’s desktop.”
Woods warned firms they should continue to expect the PRA’s supervisors to have their ‘eyes peeled’ their ‘ears to the ground’ and able to smell when something was ‘off’.