Speaking at The Specialist and Lending Event (TSLE), Matthew Jackson, director of Mint FS, said there were challenges in the residential and BTL sectors around affordability, with the former subject to a loan to income cap and the latter under pressure from stress tests.
“When you look at professional landlords and how their income is treated and how they’re stress tested, the rules around that – in terms of affordability – need to adapt and change.
“The common issue is that when [borrowers] are with a specialist lender already, they can’t actually remortgage and keep that rate [due to affordability],” he added.
Jackson noted that long-term fixed rates from “niche lenders” like Perenna could help with affordability, but that there was more innovation needed in several areas.
On the residential side, he said lenders could look at how the deduction on payslips, such as pensions, could help with affordability.
Affordability innovation will come from ‘product development and entering new parts of the market’
Phil Quinn, national account manager at Bluestone Mortgages, said that once a lender reaches a certain size, only a certain percentage of their book could be four-and-a-half times income or high due to regulation.
“Lenders that are established will always find the challenge on income multiples. With innovation continuing in the market, we do see new lenders enter that space for temporary periods of time, so you’ll be able to find lenders that will lend greater than five or five-and-a-half times income even, so some of the smaller lenders that may not be so well-known will, for a period of time, be able to use higher-income structures,” he added.
Quinn said that he was seeing more innovation on the specialist side in “what can be used in terms of affordability” so the “income multiple doesn’t necessarily become the issue”.
“It’s more around what can we utilise to make up the income so that will generate the maximum borrowing, so you’ll see the likes of utilisation of net profit, limited company, multiple sources of income, treating contractors and CIS workers as employed to generate income on gross figures.
“So, specialist lenders will evolve as we move through 2024, but bear in mind we do have some restraints on income multiples themselves, so a lot of innovation will come from product development and entering new parts of the market to just have additional target audiences,” he explained.
When asked about Office for National Statistics (ONS) data, which is used in lender calculations around affordability, Quinn said that it was at a “crossroads” in terms of “income versus commitments”.
“Frankly, I think lenders nor regulators have the confidence at the moment whereby we know what commitments will look like… because there are so many fluctuations at the moment – gas and electric bills, for example. It’s just a yo-yo at the moment.
“So, how can lenders and/or the regulator have confidence in the stability of commitments to allow perhaps a greater level of borrowing? I think we’re in a bit of a tricky spot with that. So, any innovation that can come beyond that would be most welcome,” he added.
Jackson continued that this highlighted the need for the specialist space, as the automatic decline of an application due to ONS data “causes real problems”.
He continued by saying that if brokers were putting through a decision in principle with a high street lender and it immediately rejected the application on affordability, “there’s very little you can do with that to work around it”, which is where a “manual underwriting process” can be very helpful.
BTL product fees can be ‘bitter pill to swallow’
Quinn said that, with high-product-fee, lower-rate products that have swept the BTL market, lenders will say that they were “being creative” and “trying to find a solution to improve ICR calculations”.
“This is probably more targeted at portfolio or professional landlords, given the pricing of the fees, and if you are a portfolio landlord – and let’s say you’ve got 10 properties and it’s a £25,000 fee – you’ll probably swallow that up across your portfolio and you might increase each property’s rent to compensate for it.
“But that doesn’t help the individual landlord or the smaller landlord, so I think lenders at the moment are having to fight for market share, fight for volume in the BTL space, just given where the market is,” he added.
Quinn noted that the BTL sector was a “quite crowded space”, so the innovation is “really… to try and help them win more business”.
He said he empathised with brokers who were showing a demonstration to a client with a seven per cent fee, adding that it could be a “bitter pill to swallow”.
“It’s not going to be right for every customer, I think that’s absolutely essential to your advice, is to know when it’s not right and when it is the right outcome for them. But there is an element of if we can’t get the deal through on this basis, it’s not going to happen regardless, so that’s probably why it’s almost a forced situation in a way, because of where the market is at,” Quinn said.
Jackson said that he had presented a case to a customer with a £50,000 fee and it was all about “understanding” and being “truthful” with the customer.
He explained that the landlord wanted to keep the property as a long-term investment in their portfolio and the only way it was going to work was with a product with a nine per cent fee.
Jackson said that “there was a lot of back and forth” internally as to how to justify the fee and what needed to be said to the client to make them aware of the reasoning, but in reality, it was “the only option”.
“There were obviously advantages to this particular person because of the size of the portfolio and the fact that we can use that fee to offset some tax, but you’re also putting it onto the loan, you’re affecting their portfolio, you’re affecting the stress testing.
“There’s so much stuff to consider around that in terms of how we advise the client, so it is a minefield without a doubt. It’s not right for the majority of people, but there are instances where it is the right thing to do,” he said.
Product transfer proc fee alignment may not be possible for specialist lenders
Regarding product transfers, Jackson said that there seemed to be a “disparity” between what lenders are offering on purchases and remortgages versus product transfer, which he said highlighted where lenders expected to get most of their business this year.
Quinn said that Bluestone Mortgages had launched its product transfer proposition in December, and it had received 600 applications since then.
“We’re pricing that based on loan to value (LTV) as opposed to adverse credit like we do on new business, so we’re really going beyond our normal way of reviewing customer profiles because we want to help customers step up to the high street, that’s what we want to do, and product transfers are a stepping stone for that.
“We’re pricing that a little bit differently to new business, but it’s more advantageous for the customer,” he added.
When asked about procuration fees for product transfers, which advisers have called to be better aligned with purchase and remortgage business, Quinn said that, as it was a new offering for Bluestone, it would have to “see how it lands a bit more”.
He said it was currently offering 35 basis point proc fee, but from a lender’s point of view, it was down to their commercials.
“Funding dynamics will differ amongst lenders, but there’ll be a lot of similarities in the specialist world, given the way they are funded, how they’ve been securitised, so commercially, it’s perhaps not viable for most specialist lenders to be able to pay the full proc fee for an existing customer.
“However, of course, we appreciate and value the work that everyone in the room does. My view perhaps won’t be helpful on this occasion because it comes down now to the balance of the commercial versus the value of advice, so I’m trying to see both sides,” Quinn added.
There is still time to register for TSLE. Events are taking place this week in Wetherby and Bolton.