Specialist lending in review: A lender perspective

Specialist Lending Solutions sat down with several specialist lenders, including Pepper Money, Together, Tab and West One Loans to reflect on the past year and what the next may have in store.

Q: What were the biggest challenges and learnings in 2023?

Paul Adams, sales director at Pepper Money, said: “As the cost of living crisis has taken hold, the biggest challenge has been affordability. With rates continually rising, customers were not only met with higher monthly payments but also often a lower maximum loan amount, leaving them either unable to purchase the home they wanted or unable to clear their existing mortgage.

“With finances stretched and households struggling, it’s important that brokers stay close to the specialist lenders who can offer the help to those who fall outside of mainstream criteria.”

Dan Narwal, intermediary relationship manager London and Essex at Together, added: “Naturally, one of the biggest challenges in 2023 has been having to adapt quickly to the rapidly changing economic environment, with interest rates continuing to change throughout the year..

“This was further exacerbated with the cost of living crisis, meaning we had to remain agile to ensure that we could continue to support our client’s needs. Most products, with the exception of bridging finance, are expected to see a decline across the market due to a mixture of lower consumer confidence, affordability and a sense of ’wait and see’ as to whether rates start to stabilise.”

Tab’s sales development director Jon Sturgess said: “Navigating through Bank of England base rate changes in Q1 and Q2 has posed challenges in managing pipeline and broker expectations, accompanied by valuation variances driven by apprehensions about property prices.”

Tab’s business development director Sophie Meller continued: “Despite uncertainty, a significant number of borrowers still required short-term finance. Adapting ourselves and our products to align with the current market needs is crucial.”

Tab’s senior business development director, Martyn Evans (North), added: “For me, the main challenges have still been the hangover from Covid and the mini Budget. This has obviously had a huge financial impact on our economy with base rate rising and investors being more cautious due to lower profit margins.”

Stephen Hogg, chief operating officer at West One Loans, said: “Against the odds 2023 has been a good year, with record origination months across our product lines. The big challenge has been interest rate volatility, and the increasing affordability stress this has brought for borrowers.

“Early in the year we trimmed our credit appetite, reducing loan to values (LTV) and increasing our stress rates. That has stood us in good stead, and we are still seeing very good credit performance across the business. The main learning for us has been around how to deliver repeated rate changes – both up and down – in a way that is efficient for us as a firm, and which minimizes disruption for our broker partners in the face of ongoing volatility.”

Q: Looking ahead to 2024, what are your expectations for the specialist lending market?

Adams said: “There are undoubtedly green shoots of optimism starting to appear in the mortgage market but 2024 will still be a challenging year for lenders, brokers and customers alike.

“Many customers continue to come off very low fixed rates and face increased monthly commitments adding to the financial challenge of the current cost of living crisis. Over 15 million people in the UK could now be said to have a history of some form of adverse credit and so the specialist lending sector is going to continue to grow over the coming months and years.

“At Pepper we will continue to develop our proposition through 2024 to enable us to assist more of these potential customers.”

Narwal continued: “Bridging, now accepted as a mainstream product, has seen growth through 2023 and I would expect that to continue through 2024, with many amateur landlords looking to sell and experienced property professionals jumping on opportunities in the market. It is also likely that second charge loans will see a continued rise, with clients looking to balance their finances after a tough 2023 caused by the increase in cost of living.

“I would expect brokers who may have traditionally focussed on the mainstream mortgage market to increasingly look at diversifying beyond their client banks, and start transacting more in the specialist lending sector. There will be a need for strong relationships, rather than an automated approach to lending, and this will be paramount to brokers’ success in 2024.

“There will be lots of customers who need a lender, like Together, who can consider forecasted income, assess affordability of a case on stated expenditure rather than ONS-based models. We are already seeing a rise in clients concerned about annual account review cycles carried out by high street banks and the impact 2023 may have had on their portfolios and businesses with many now looking to move to a lender who will support them through the challenges the market may present.”

Sturgess said: “In 2024, we anticipate a surge in brokers transitioning to specialist lending as the residential market experiences a slowdown. Welcome to the land of specialist lending.”

Meller noted: “In 2024 there will hopefully be stabilisation of the base rate contributing to increased confidence in the market.”

Evans added: “There seems to already be a grown confidence around base rate and the mortgage market. I think we will see the continuation of residential mortgage brokers diversifying their skill set into the specialist market and this presents more opportunities in this space.”

Hogg said: “We’re cautiously optimistic about the coming year and we expect to lend more than we did in 2023. The purchase market will likely remain muted, but we expect a lot of refinancing activity. Borrowers will be motivated to transact in a stable – or, if you believe markets, a falling – interest rate environment. Our strategy is the same as always: be a dependable source of funding in all market conditions, lend profitably, and provide a stellar service to brokers.”