The main focus of the report, authored by Rob Thomas, director of research at the IMLA, is on specialist residential lending (lending to owner-occupiers that falls outside the criteria of mainstream lenders).
His conclusions as to the outlook for the sector make encouraging reading for lenders as he outlines several positive trends driving growth:
- First, a rising share of mortgages is being sourced through intermediaries who can scan all lenders for the most appropriate loan for a customer based on price or suitability rather than brand. This gives even the newest mortgage brands a chance to compete;
- Specialist residential lending levels are way below those of the pre- financial crisis era, suggesting that there is still plenty of unmet demand;
- At the same time, key cohorts that would usually be expected to need specialist residential loans have been increasing. The self-employed have increased to 4.8m in the UK, 15% of those in work, against 3.8m in 2008, or 13%. Staff on zero hours contracts rose to 910,000 in the UK in the final quarter of 2016 compared to less than 200,000 in the same period of 2011. And there were a record 912,000 county court judgments issued against consumers in England and Wales in 2016, a rise of almost a quarter on 2015, which may limit people’s access to mainstream lending in future, even if they have rehabilitated their finances;
- At the same time the mainstream lenders have shown a muted appetite to win business that falls outside their automated underwriting parameters, which are designed to accept conventional borrowers. With these lenders constrained by regulation, governance and conduct risk issues, their appetite for non-standard lending is likely to remain curtailed relative to previous cycles. This suggests that margins should remain substantially higher in the specialist residential market, providing the necessary returns to justify the higher risks.
He asks the question as to how large the specialist residential sector might become? In answer he estimates that the “overwhelming majority” of the £16.7bn lent in 2016 to the specialist market was buy-to-let, with all specialist residential lending amounting to only £3bn last year, a lot smaller than at the peak of the housing boom.
“This points to very high potential growth in the market even if specialist residential lending does not regain its previous highs,” he concludes.
However, the question remains, what needs to change in order for specialist residential lending to grow significantly?
Is affordability the elephant in the room? Arguably, even with mortgage interest rates at all time lows it would appear that workers on zero hour contracts and a growing army of self-employed on lower than average earnings aren’t able or willing to take on the risks of a residential mortgage when property prices are falling. This is true particularly at a time when inflation is cutting living standards for the majority.
Director of research Thomas, takes issue with this viewpoint reiterating: “Such a low level of specialist mortgage lending compared to 2007, means that there is still a strong case for growth.”
For mortgage brokers that focus on specialist lending, this is good news.