Specialist lending in review: A broker perspective

Specialist Lending Solutions sat down with several specialist brokers and packagers, including Brightstar Financial, Crystal Specialist Finance and Aria Finance to reflect on the past year and what the next may have in store.

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

Bradley Moore, managing director at Brightstar Financial, said: “Brokers have had so many changes to try to keep up with this year, with new rates being introduced on an almost daily basis.

“However, it’s not just rates that have been changing. Lenders have made frequent tweaks to their criteria and for brokers who don’t work regularly with lenders in a particular sector – such as specialist residential, second charge, buy to let or bridging – staying up to date with the market has been practically impossible, making it hard to make the right decision on where to place a case.

“This has put even greater emphasis on the importance of accessing specific sector expertise, either within your own business or by working with a trusted partner.”

Jo Breeden, managing director at Crystal Specialist Finance, said: “The market in 2023 should have settled but the opposite was the case given the rate of the continued interest rate rises, and the subsequent lender product withdrawals and criteria changes.

“As a specialist finance distributor, this meant we had to resubmit cases with little or no notice but as our expert underwriters are in product specific teams, we minimised the impact and maintained our service levels. Other knock-on effects of rising interest rates were clients’ ability to meet interest coverage ratios (ICR) in the buy-to-let market and affordability. A key learning is to expect the unexpected and be prepared for all eventualities.”

Lucy Waters, managing director of Aria Finance, continued: “For brokers, the biggest challenge of 2023 was having to constantly readvise on and rekey cases, not only as rates climbed at the start of the year, but also as they started falling towards the end. Essentially, it meant that brokers had to do two or three times more work for each case than they normally would, all for the same money, which has undoubtedly affected sector profitability this year.

“It’s no surprise, but the biggest challenge for borrowers has been having to deal with rising rates, and the affordability pressures that come with that, after more than a decade of rock-bottom borrowing costs.”

Q: Looking ahead to 2024, what are your expectations?

Moore noted: “It’s been said before, but specialist lending should really be a part of every broker’s offering – and this will definitely be the case in 2024. The cost of living crisis is leading to more missed payments and borrowers working multiple jobs to make ends meet.

“Buy-to-let investors are increasingly looking at ways to counter their higher costs with investments that can offer greater yields, such as houses in multiple occupation (HMO) and multi-units.

“The bridging market continues to grow in size and reputation for both regulated customers and investors. We’re also seeing a growing appetite for commercial and semi-commercial borrowing. These are all opportunities that brokers should be looking to access in the next 12 months.”

Breeden added: “The property finance market will be tough for the first half of the year but there are many opportunities.

“At Crystal, we are seeing larger cases return to the market as clients adjust to the higher interest rate environment. The correction in the housing market will continue. There is a shortage of property and mortgage approvals, which will fuel the rental market and the investor sector. Consequently, there will be growth in both professional buy to let and bridging.

“The second charge market is also likely to expand for two reasons. Homeowners will choose to ‘improve not move’ and the real impact of the cost of living crisis is yet to be really felt. So, debt consolidation will increase.

“More consumers will require specialist lending support due to their credit profiles and working patterns so brokers need to look ahead and identify these opportunities. The ‘refer and earn’ model is also going to be a great opportunity for brokers, allowing them to free themselves of regulatory responsibility and focus more on new business creation.”

Waters noted: “I am much more optimistic going into 2024 than I was going into 2023. Borrowers are getting used to the shock of higher rates, which may make them more inclined to transact.

“On top of that, talk has shifted from rate rises to rate cuts, even if there is no guarantee that will happen next year. Regardless, the mere talk of rate cuts will boost consumer confidence, something the market has been short of for the past 18 months.

“It may be too early to talk about a recovery, but it feels that maybe we are over the worst. There will be challenges, of course, and I expect the purchase market will remain muted next year, but things don’t look quite as challenging as they did last December.”