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Broker-turned-lender Habito wins plaudits and raises eyebrows on launch – analysis

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  • 09/07/2019
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Broker-turned-lender Habito wins plaudits and raises eyebrows on launch – analysis
Habito’s entry to mortgage lending provoked a mixed industry response, with one person dubbing it “a cattle prod” to innovation while others raised an eyebrow over potential conflict of interest.

 

The technology-powered broking house secured £500m from an as-yet-unnamed, “leading, Financial Conduct Authority- (FCA) regulated financial institution,” to provide buy-to-let mortgages for individual landlords. The products will be available exclusively through Habito Brokerage.

The fledgling lender sought to differentiate with an expedited application process that “involves deeper checks at the outset, guaranteeing greater certainty and speed”.

The “Habito Instant Decision” was described as covering a basic affordability check, basic credit check, a comprehensive affordability and credit check, an automated property valuation and an identity check. This was contrasted to a conventional Decision in Principle that covers the basic affordability check and basic credit check.

“It’s welcome because it’s a challenge to the status quo—a cattle prod to those who may be doing it less quickly,” said Ben Thompson, deputy chief executive of brokerage Mortgage Advice Bureau.

“Anything that can be done to make the underwriting process quicker and to give more certainty can only be a good thing. It’s not a well-kept secret that conveyancing takes too long in the market generally. If that side could be sped up, that’s great,” Thompson said. 

 

Segments and pricing

The new products struck some commentators as less enticing on price, particularly because amateur landlords are already well catered for by larger lenders. 

The new Habito product range comprises two-, three-, five-, seven- and 10-year fixes with loan to values ranging from 65 to 80 per cent, up to £750,000. The company claimed it was “the market’s most comprehensive range of loan to values and fixed-rate periods”.

Rates start at 2.59 per cent for a two-year fix at 65 per cent LTV, rising to 4.47 per cent for a 10-year fix at 80 per cent LTV.

Habito has further outlined a plan to extend the product range to include mortgages for limited company and portfolio landlords, as well as residential customers, later this year.

Thompson continued: “The fundamental dynamics of what drives people to do things don’t change. BTL is a subset of the market and people shop around looking for a decent price. Habito is going to need to lead on price to attract people away from bigger brands. 

“They’ll do well and pick up business, but does this make a massive impact in the market in the short-term? No,” he said.

Ying Tan, founder and chief executive of mainstream and buy-to-let broker Dynamo, said:

“The rates don’t look hugely attractive so you want the criteria to be strong to ensure that the proposition’s good.

“How automated is the offer? I wonder if there is a bit of smoke and mirrors.

“My understanding is that Habito is strong in residential which is quite different from BTL. Even at the vanilla end, BTLs are more complex and complex BTL is very, very difficult. 

“Habito is based on clever algorithms and robo advice. It may be underestimating the complexity of BTL to think that a simple algorithm can decide. BTL is more complex and requires more manual underwriting.

“If it’s just a BTL product transfer maybe for remortgages then it might work. 

“If they are looking to do £500m in their first year in BTL that’s quite ambitious,” he added.

These questions as to the extent of automation within the application process were echoed by David Hollingworth, associate director, communications, L&C Mortgages.

“The rates are not desperately low but they are talking about criteria and speed playing a part. If you can produce offers quicker that certainly has a value for some. It’s getting the right balance of price and features,” Hollingworth said.

The products were designed based on landlord research. They feature no minimum income requirement for first-time landlords up to 75 per cent LTV, no minimum value or maximum loan restrictions on ex-local authority flats and no penalties for landords whose tenants receive state benefits.

Proof of three months’ income is required and for self-employed borrowers that rises to two years

Hollingworth: “It depends on the customer. If it’s straightforward and packaged correctly there’ll be other lenders who can point to quick turnaround times. 

“If this is aimed at very straightforward cases that have got through the initial automated credit decisioning then perhaps that opens up a chance for good processing times

“If you get more complex cases, then there can be to-ing and fro-ing on documentation. How do you remove that when you’re talking about developing more complex buy to let products?”

 

Conflict of interest

 

The bigger challenge from industry compatriots was about potential conflict of interest between Habito’s broking operation and the new lending arm. 

BTL, alongside bridging and commercial development lending, is unregulated, meaning that there is no regulatory requirement for would-be borrowers to take advice.

Tan said: “A broker trying to be a lender is a dangerous game to play. It’s important to make a decision whether you’re one or the other.

“We’ve been approached by a number of lenders over the past three or four years given our size, scale of distribution—many lenders want us to help distribute their product under our brand.

“It’s nothing ground-breaking. The reason we have always said no to the idea—and I’m not saying we’d say ‘no’ forever—is that there is a real potential conflict of interest.

“If I’m advising a customer, how true is my independence?

The wider upside for the BTL broker market was seen to be implied by how well lenders value intermediary distribution.

“There is clearly an appetite to take mortgage-backed assets. Brokers have a crucial part to play in connecting those investors who want to attract that type of borrower. That’s what it underlines,” Hollingworth said.

 

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