According to IMLA the potential is high. It says specialist residential lending, focused on borrowers who fall outside mainstream lenders’ criteria, was only £3bn last year. Mainstream banks show no appetite for moving into specialist sectors and higher capital requirements mean the market has more stability.
“Specialist lenders are more conservative than in the past, and bound by tighter regulation such as increased capital requirements making them less vulnerable in a downturn. Furthermore, the market is bigger than ever, so these lenders have been able to grow and fill underserved areas,” says IMLA executive director Peter Williams.
Masthaven MD for mortgages Matt Andrews agrees, pointing to the rising levels of self-employed or contracting borrowers, who fall outside the factory underwriting of the mainstream lenders.
“Self-employment and contracting are growing. Economic pressure on companies means that is likely to continue to allow flexibility of resource. Specialist lenders build themselves to understand specific customer groups and have the infrastructure for that. Specialists will always win because we specialise.”
He adds that near-prime customers who have suffered a credit blip because of personal circumstances such as bereavement or unemployment are another growth segment. “County Court Judgments are at their highest ever and that’s going to ripple through,” he notes.
Mainstream banks retrench
Andrews says the sector has been significantly limited by lender undersupply in the past but the number of lenders offering these products has grown significantly, especially with the advent of challenger banks.
In times of economic uncertainty, he adds, mainstream banks retrench and will avoid customers who have more complicated and time-consuming needs.
Richard Tugwell, group intermediary relationship director at Together, says with mainstream criteria becoming increasingly rigid, many customers are turning to niche lenders.
“The self-employed, high-net-worth individuals with complex income streams, those looking for interest-only mortgages, those with unusual property types, or looking for mortgages for right-to-buy or shared ownership, and those who have recently moved jobs, for example, are just some of the types of customers that may struggle to obtain mainstream finance, but are well-served by the specialist lending market,” he says.
“As a result, demand for specialist finance looks set to continue growing, despite any wider economic issues.
“In many ways the specialist market acts as a complement to the mainstream, and ensures that customers have a choice. I think the challenge for the specialist market is ensuring more consumers are aware of this offering and that’s something that lenders and brokers need to work together on.”
Andrews says the fact that the lending differs from mainstream does not mean the specialist sector is on shaky ground, rather that it is set up to cater to complexity. “Specialist lending and underwriting does not mean irresponsible or poor quality,” he says.
And the focus on affordability means reports of over-indebtedness rising are not a threat to the market. “We make sure affordability calculations work effectively and deploy all the appropriate stresses under the mortgage Market review (MMR). We are rigorous on affordability,” he says.
Dale Jannels, managing director of broker, packager and distributor AToM, agrees. “It’s not a fly by night sector,” he says.
AToM has dealt in specialist lending since 1996, through the financial crash. “We lost all of the securitisation lenders, but that possibly was a good thing as at certain points, we could almost do any mortgage,” says Jannels.
“It is more regulated now and affordability is the key to everything, so it should be less volatile. That’s also on the assumption we’re not so reliant on the securitisation markets….which are now also creeping back in, as new lenders enter the specialist arena.”
High street influx
Jannels suspects that the high street lenders will venture into the area in some capacity when volumes don’t reach the targets required. “But they will never have the flexibility to think outside the box as some of the smaller building societies [and others] can currently.”
A number of the larger lenders also have legacy systems, which are costly or impossible to bring in to the specialist arena requirements.
Liz Syms, CEO of Connect for Intermediaries, says there is plenty of room for growth in the specialist market. “We are in a much tighter regulated environment than we were before the credit crunch, and according to IMLA there are still a large number of unmet needs of clients, giving lenders lots of scope to innovate without inadvertently causing issues in the market.”
She says it is unlikely that mainstream lenders will seek to cannibalise the specialist market as their systems aim to minimise the need for complex underwriting undertaken by specialists and they are more likely to tweak rates than criteria.
“Specialist lenders find changing criteria easier to do than mainstream lenders because changing criteria and making it fit for submission on the legacy systems that most mainstream lenders have can take a very long time,” she says.
While consumer over-indebtedness applies to the unsecured sector rather than secured loans, Syms says this is an area lenders must keep tabs on.
“Any escalation of an individual’s overall debt levels has to be of concern to every lender, specialist and mainstream, as it affects a borrower’s ability to pay back all loans. However both the regulator and the Bank of England are turning their attention to this, so I believe that we will start to see more measures put in place to keep it under control,” she says.
AToM’s Jannels believes over-indebtness is an issue. “We see first-time buyers leaving university with upwards of £30,000 in student loans, and having been able to get a brand new car for £199 per month (another debt of £12,000-15,000),” he says.
“So already they’re looking at £42,000+ debt before they start. Everything is interest free, buy now pay later or HP and this is a spiral that’s absolutely going to get worse. Add in a generation of mortgagees who have never had a rate rise and yes, people are living on the breadline. Any rate rise, no matter how small, will have a significant impact.”
IMLA says the sector is prepared. “Clearly it is an important factor, one that cannot be ignored – not least with the rise of second mortgages,” says Williams.
“Lenders are aware of the pressures and as such, rigorous income and expenditure assessment and credit checks as part of the mortgage process ensure that they are taking a close look at borrowers’ overall debts and outgoings.
“While there is a risk of borrowers subsequently increasing other debts, aggregate figures on consumer debt show this is still much lower relative to incomes than before the financial crisis.”