This week Fitch Ratings expressed concern about how quickly challenger brands had grown within the UK mortgage market, and cautioned that they may be more at risk in the event of a downturn as they may not be sufficiently rigorous in the underwriting.
The firm stated: “We view sustained above-market-average growth as a potential risk to a bank’s credit profile because it may indicate under-pricing of risk or a loosening of underwriting standards to generate volume.”
It followed warnings from the Prudential Regulation Authority that lenders were making “a material move up the risk curve”, with Sam Woods, head of the PRA, adding “We should be watching them like a hawk.”
Concern about the stability of lenders is seeping through to borrowers too. A study by Cambridge and Counties Bank revealed that only one in five landlords were confident in their lender’s stability.
James McGregor, director at Mesa Financial Consultants, said that while lenders have learnt lessons from the financial crisis, the competition for business is so strong they feel they need to do something to attract clients, which may mean taking on more risk.
“We have already seen Metro make a huge mistake with their strategy,” he added.
Well-established brands are safer
Andy Wilson, director of Andy Wilson Financial Services, said that his firm is less likely to use challenger banks and smaller, new entrants to the market.
He added: “We consider well-established brands to be generally safer in the long term than some of the challenger banks and lesser known lending firms. It takes a new lender a considerable amount of time to gain acceptability amongst the public, and while we can sway their view, it also takes time to win brokers over.”
Wilson also noted that the recent demise of lenders like Tesco, Magellan and AA mortgages should serve as a warning that “some of the newer lenders to enter the market may also be some of the first to exit when times get hard”.
We don’t want any more mortgage prisoners
McGregor said that perceptions of how stable a lender is “definitely” comes into play when advising clients.
He explained: “If there is minimal difference in the pricing we will try to sway towards the more established lenders for sure. When lenders stop trading we have seen the mess it can put clients in; there are too many mortgage prisoners out there already, we don’t want to create any more.”
Wilson agreed, noting that the current debates over the difficulties in providing support for mortgage prisoners “should also make advisers think twice about who they place their business with”.
Challengers may be in strongest position
However, Nick Sherratt, managing director of Mojo Mortgages, argued that technology-based challenger banks may be in a much stronger position should there be an economic downturn, as their tech “helps to unlock entirely new business models and allows companies to trade much leaner and generally with a lower cost of service”.
He added that there is far more “common sense lending” now, with enough regulation in place to ensure lenders cannot take undue risks.
“One of the fastest growing mortgage lenders in the UK, Atom, is a fintech challenger, with competitive products and a robust business. If the product is right for the customer it’s essential we discuss it within our advice process,” he concluded.
Much tougher regulation
Andrew Burrell, chief property economist at Capital Economics, noted that while there had been an “uptick in riskier lending”, financial regulation is much tougher than a decade ago so there doesn’t seem to be any immediate concern at current interest rates.
He added: “Buy to let is a specific specialised area where the prospects are not so good because of the various tax changes. But these niche lenders are unlikely to present a systemic threat to the financial system on their own.
“Overall, we expect the demand for credit and the supply of it will remain fairly tightly restricted and, although you can never rule out isolated problems, we don’t see financial stability as a major risk at present.”
Greg Cunnington, director of lender relationships and new homes at Alexander Hall, agreed, noting that the affordability requirements of lenders and stress testing procedures are much more stringent now than back in 2008.
“As such lenders’ mortgage books are already set up to withstand any increase in interest rates and wider economic pressures,” he added.