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More lenders could exit tough market, Help to Buy families face negative equity – FCA

  • 18/02/2020
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More lenders could exit tough market, Help to Buy families face negative equity – FCA
Challenging market conditions are piling the pressure on mortgage lenders and set to force more out of the market, while Help to Buy borrowers are at higher risk of negative equity, the Financial Conduct Authority (FCA) has warned.


Borrowers increasingly opt for five-year fixed-rate mortgages, instead of shorter term fixes, which has reduced activity, the regulator said in an assessment of risks across financial services markets.

As a result, there are expected to be fewer people looking for mortgages in 2020.

Limited housing supply and reduced demand for buy-to-let borrowing are among other factors reducing lending volumes.

Yet despite fewer borrowers, the number of firms in the market has increased by 30 per cent, from 128 in 2008 to 167 in 2018, the FCA found.

In its Sector Views, the FCA raised concerns that greater competition for fewer borrowers has resulted in smaller lenders targeting higher risk borrowers.

Last year Tesco Bank, Sainsbury’s Bank and Secure Trust Bank were among the names that left the mortgage market.

The FCA said: “We expect to see further firms ceasing to lend in the near to medium-term.”

It comes after annual results of a number of big lenders, including Santander and TSB, showed that mortgage competition is affecting margins.


Help to Buy negative equity risk

The FCA also raised concerns that Help to Buy (HTB) borrowers are more likely to face negative equity if property prices begin to fall.

By the end of 2018, 211,000 consumers had used the schemes to buy properties.

These homeowners could be more exposed to any change in economic conditions, the regulator warned.

A stagnant housing market, combined with the new build premium, could mean a reduced number of re-mortgage options relative to a non-HTB property, it added.

Around 60 per cent of HTB first-time buyers paid the minimum deposit of five per cent, compared to 40 per cent of non-HTB first-time buyers.


Concerns over Libor-linked mortgages

Libor-linked mortgages were highlighted as another worry.

More than 200,000 mortgage contracts are linked to the benchmark interest rate the London Interbank Offered Rate (Libor).

This rate is set to be removed after 2021.

However, a “small number” of firms are still offering Libor-linked mortgages.

The FCA said it is “monitoring this issue closely” and added that firms need to consider how their contracts will operate when Libor no longer exists, and whether the terms allow the contract to be moved to an alternative benchmark.


Consumers missing out on cheaper mortgages

The regulator also reiterated concerns over consumers who could have found better value mortgages than the deal they are on.

A significant number of mortgage products make it difficult for consumers to establish which they are eligible for and identify good value for money, the FCA said.

It quoted last year’s Mortgages Market Study that found around 30 per cent of consumers paid around £550 a year more compared to the cheaper product – this applied to borrowers who went direct or to an adviser.

The FCA also flagged so-called mortgage prisoners who cannot switch products because they fail to meet tougher borrowing criteria.


Debt levels rising

At the same time, the regulator stressed more than seven million adults in the UK are overindebted and find their financial commitments a burden.

The FCA said the number of people who are struggling to keep up with domestic bills and credit repayments is growing.

Some business models are designed to exploit vulnerable credit-dependent consumers and customers in financial difficulties are now always treated appropriately, the watchdog added.

Over 39m people have outstanding borrowing totalling £1.66trn as of October 2019, including mortgages.

The FCA also found that pricing practices in insurance still penalise loyal customers while high-risk retail investment products are exposing consumers to more risk than they can absorb.

The regulator further highlighted that some products from new payment providers do not have protection in place for consumers, for example e-money services advertised as ‘current accounts’ are not covered by the Financial Services Compensation Scheme.


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