Brokers fear rising cost of living will lead more to take on unsecured debt ‒ analysis
Brokers said unsecured debt was very easy to obtain, with only a credit check required in a lot of cases.
Some noted that often loans were offered through digital banking, making it simpler to potentially take out significant sums of money.
Rob Derry, managing director of Brunel Mortgages, said: “It is absolutely crazy, they do a basic credit check and then the funds can be sent over super quickly.
“Someone with good credit score could log on and borrow a significant amount of money and stick it somewhere and stretch it out to the maximum term in case they want to cover rising bills in the near future.”
He said there may be a lack of understanding about how taking out such loans could negatively impact a credit score, and that some borrowers may have a certain complacency around their credit score and assume it will always be good.
Derry said digital banking users were often offered loans through a lender’s app, which created a sense of trust as users may assume that they would not be offered the loan if the bank did not think they could afford it.
He also said when people check their credit score, they could then be offered more credit cards and loans, which could be very tempting in the current cost of living crisis but may not be the most financially responsible decision.
He continued that as the cost of living rose, people may access loans to save for a “rainy day” but not realise the long-term ramifications this could have on their mortgage affordability.
Derry explained that the monthly loan payment would go down as a regular commitment, and therefore decrease what the customer could afford and therefore borrow for a mortgage.
“It should be a lot harder to get unsecured debt. People might feel the pinch initially but then it would be better for their financial health in the long-run.”
He said that more checks should be needed before unsecured debt was given, whether that was in the form of pay slips or banking statements for that extra level of protection for the consumer.
According to recent figures from The Money Charity, the average total unsecured debt per adult was £3,771 in February this year. This compares to £3,724 in February last year.
The average total debt per UK household in the same period was £63,803, which is up from £60,935 in February last year.
Existing mortgage borrowers could struggle to remortgage
Zoe Goodchild, managing director at Apostle Financial Services saidexisting mortgage borrowers could be “tempted” to take out unsecured debt to “try and sail through this cost of living crisis”.
She added that as the cost of living worsens, the number of people looking at unsecured debt or second charges would rise and could “cause major issues should property prices start to fall”.
“For us, the question is not if house prices fall, but when. Borrowing at the moment is dependent on many things, namely a good credit file, steady income and loan to value, however this potential extra debt people may get into will undoubtedly cause issues should they need to remortgage,” she explained.
She said some lenders would still have the appetite to lend to people in such situations but this could “come at a cost that many will not be able to afford”.
Goodchild urged those looking at taking on additional debt to seek advice from a broker to explore different options such as remortgage or a secure loan.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said those thinking about borrowing money to pay household bills should reconsider.
“This is not going to help you in the long run and will likely create issues for you in the not-too-distant future. Mortgage lenders hate seeing payday loans [or unsecured debt] on someone’s credit file, so you really could be shooting yourself in the foot. Borrowing more money when you are already struggling is very rarely the right move,” he said.
He said those who were really struggling should ask for help from existing lenders across the board, whether that is for a car loan, credit card, personal loan or mortgage.
“Ultimately, it is in their best interest to help you pay the money back to them, so they have teams set up to help. That could mean something as simple as them agreeing to a longer term to reduce your payments, or a temporary period of time on interest only,” Taylor-Barr added.
He noted that action could be “more assertive” as lenders could agree to help once they have assessed your income and expenditure and then ask to cancel certain items first, such as TV and entertainment packages.
Borrowers should seek a mortgage broker and contact bill providers
Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, said borrowers considering taking out unsecured debt should contact household bills providers to see what support could be available and examine outgoings to see what could be reduced.
She added that speaking to a mortgage broker could be vital, as the mortgage was often the biggest financial commitment.
“For those that do find themselves in this situation, specialist advice from a qualified whole of market mortgage broker will be vital in these situations to ensure that they can access the most suitable mortgage options,” Bickford noted.
“I am passionate about ensuring those with ‘real life situations’ can still obtain the most suitable mortgage deal for them and I am concerned there will be lots of first-time buyers or existing homeowners in this situation in the future.”
Broker Tembo takes down test page suggesting students pay off study loans via remortgage – reports
First investigated by Money Saving Expert, the broker said that it had several customers and families that had asked about paying off student loans, given uncertainty of tuition fees, so it created a test page on its website to “gather some user insights and speak to some potential customers as part of a market research exercise”.
The test ran for around three weeks and some of the adverts suggested that people could pay off their loan with a remortgage and save £20,000 in interest. The broker said that the remortgage could be taken out against the borrowers or a family member’s property.
Undergraduate tuition fees are currently £9,250, with government plans to freeze them until 2024 to 2025. However, student loan interest rates for upcoming loans this autumn are expected to sit at around 12 per cent, which has raised concerns around how or if they will be repaid in full.
Richard Dana (pictured), chief executive of Tembo, said: “This was the first test we’ve run in this way, and unfortunately there was a breakdown in our usual compliance process which meant the test went live without formal approval.”
He added that in light of the error it had “re-evaluated” its internal processes so it could not happen again and future user research and tests would be “subject to our usual stringent compliance checks”.
Dana said that around 25 per cent of graduates were expected to repay their student loans during their lifetime and that people who would benefit from considering early repayment would be “higher earners with a stable income and a property”.
“It’s not for everyone, but for certain people there is the potential for significant interest savings,” he said.
He continued that student financing was not a core focus at Tembo and to finish the test it was collating all of its feedback and user insights.
Dana added that Tembo had informed the Financial Conduct Authority on the oversight.
Lenders have made a good start with green mortgages – Halifax Intermediaries video debate
Speaking on a Mortgage Solutions video debate in association with Halifax Intermediaries, Roberts said: “I think lenders have made a really good start in terms of innovation, but there’s a really long way to go.
“We now need to start demanding from lenders that we get much more focus on that. It’s not just a discount for A to C, whilst that’s nice, it’s not necessarily helping the issue.”
He suggested that there needed to be help available so people could improve their home’s EPC rating and get the finance for it.
He added: “Maybe we can be more creative around affordability measures if it’s for green [mortgages].
“Maybe we can have much more cashback, maybe we can have more marketing. Some consistency, maybe, from the lenders would be really helpful. Education is always good – if lenders could collaborate a little bit more.”
Bukky Bird, group sustainability director at Barratt Developments, said “the dream” was for every conversation a homeowner had about financing their home to consider the benefits of being energy efficient.
She also proposed the idea of “genuinely impactful financial products” which factor in the savings that can be made when making a home more efficient.
Andy Mason, head of strategic partnerships and housing at Lloyds Banking Group, said he wished to continue having “great” and “practical” conversations around green mortgages.
He said Halifax was working on improving the quality of its backbook from an average EPC rating of D to C.
He also said the bank was looking at piloting products to encourage people to retrofit their homes and improve energy efficiency.
Watch the video embedded [7:01] hosted by Shekina Tuahene, commercial editor at Mortgage Solutions, featuring Andy Mason, head of strategic partnerships and housing at Lloyds Banking Group, Bukky Bird, group sustainability director at Barratt Developments and Kevin Roberts, director of Legal and General Mortgage Club.
Sponsored content in association with Halifax and Lloyds Banking Group. For Intermediary Use Only
‘Growth areas’ are second charge, bridging and commercial – Rainbird
Speaking to Specialist Lending Solutions, managing director of Truffle Specialist Finance James Rainbird (pictured), said that the firm had had a record quarter for second charges in its most recent three-month period.
He said it was “happy with its direction of travel” in the space, however, he said that the firm was looking to ensure it had the “right resource going forward to keep pace with demand”.
“There is strong, and growing demand in this product space, and it’s up to us to ensure we are effectively resourced to continue to meet that demand,” Rainbird noted.
Rainbird said that this is an area of growth as consumer awareness of the product increases and lenders continue to bring out new product offerings.
He also pointed to the withdrawal of further advances and remortgages as a potential “boost” to the second charge mortgage market.
Rainbird said that it could be “very difficult” for new businesses to enter the market without “real experience and lender relationships”, adding that lenders’ back-office teams could be “challenging”.
He said that the firm’s underwriters were “working tirelessly” chasing consents, redemptions and building society questionnaires, and that this could slow the process as a lot of bank staff were still working remotely.
“The volume the banks are receiving as well is high. You’ve got to have a good back-office team, good CRM systems in place to ensure that you’re getting those results then for the consumer and for the introducing brokers,” Rainbird noted.
He added that “strong working relationships” with lenders, surveyors and accountants were “absolutely key”.
Rainbird continued that bridging and commercial was a “key area of growth for the firm” and that locally it was looking to grows its first charge and protection division as it was “actively recruiting in that area”.
Based in Penarth, which is just outside of Cardiff, Rainbird said that several lenders had left the high street, which presented an opportunity for Truffle to fill the gap.
He said that Penarth was predominantly made up of over-40s, professionals and quite an affluent area, with many still wanting to have “face to face” meetings.
Rainbird said that whilst it was always looking for the “right candidates” to grow its advisory team, this had to be balanced with back-office support.
“You can write as much business as you want, but if you don’t have the back office support and relationships then you’re going to struggle. So yeah, there’s a balance for us between advisers and underwriting,” he said.
Investing in CRM system to give brokers ‘accountability and better reporting’
Rainbird said it was “investing substantial funds” into a new CRM back-office system, which will “help streamline our internal process” and give “brokers some accountability and better reporting, a case tracking system as well, where they can actually upload documents”.
He added that this would “minimise the amount of traffic” that’s coming into the office, such as emails and phone calls.
“Technology is hugely important for our business going forward and for our introducing brokers as well, if we can make it increasingly attractive for them. It helps in terms of reporting, incentives and client retention– if we have greater automation, it incentivises our introducing brokers to stay with us,” he explained.
Affordability challenge for consumers
Rainbird said that Truffle had seen an increase in applications across all product sectors but was not able to place a number of them due to affordability issues.
He cited several factors that were impacting affordability, including interest rate rises and cost of living increased.
“We’re often still able to find solutions for clients in those circumstances. That’s a positive in itself because we are saying to our introducers, who have those clients, that we are able to help them place those deals,” he noted.
The business offers specialist first charge residential, second charge, first and second charge buy-to-let, bridging, equity release, development finance, commercial finance and mortgage protection business.
“Affordability has always been an issue. But, thankfully, we’ve got lenders that are proactive, and they’re always looking at ways they can perhaps tweak their criteria in order for us to continue to write business and for consumers to have the right products.”
Rebrand has led to increase in new business
Rainbird said that there had been “incredible reception” from existing brokers, the media and local businesses following the rebrand to Truffle Specialist Finance.
He said that there had been a perception from local businesses that the firm only did second charges, unsecured and payday loans, however, this had now changed.
Rainbird said that it had seen an increase in new accounts since the change.
“I think from where the business was and has come from, to where we are today, certainly as an industry and as a business the word loans has become antiquated. If we have a look at the suite of products that we offer, the word loan is not used,” he said.
“I think it was perfect timing for us to just to bring the brand up to date and for it to also reflect on our time in the industry, our professionalism and our commitment to the industry as well.”
BoE rate decision could spur borrowers to take out long-term fixed rates
John Phillips, national operations director at Just Mortgages, said that the 0.25 per cent increase “came as no surprise to anyone” as the chancellor had warned rates could hit 2.5 per cent by the end of the year.
Phillips said that along with the cost of living crisis, the rate rise could mean pressure on household budgets will become the “greatest it has been for a decade.”
“While consumers have little control over their energy bills, they do have the opportunity to secure long term security in the form of a fixed rate mortgage. As a result, our network of mortgage advisers report that conversations with borrowers around longer-term fixed rates have never been higher,” he explained.
Colin Bell, co-founder and chief operating officer of Perenna, said that lenders had pulled 500 mortgage products, and average two-year fixed rates had reached a seven-year high.
He said: “This is clearly having a detrimental impact on consumers’ ability to get onto the property market. Flexible long-term fixed rate mortgages can provide a solution to the problem, allowing individuals to better manage their monthly outgoings, while avoiding any unnecessary stress caused by multiple interest rate rises.”
Figures from Moneyfacts show that the price of a five-year fixed rate mortgage is 3.17 per cent, whereas the price for a 10-year fixed rate is at 3.21 per cent.
Rachel Springall, finance expert at Moneyfacts, said: “Fixing for longer may be a logical choice for peace of mind with mortgage payments when other household costs are increasing. The differential between the average two-year and five-year fixed mortgage rate is much smaller than in previous years.
“However, aspiring homeowners may need to rethink whether they can even afford to step onto the property ladder due to rising costs and soaring house prices.”
Simon Webb, managing director of capital markets and finance at Livemore, said that there has “never been a better time” for borrowers to take out a longer-term fixed rate mortgage, as there would be further base rate and inflation increases this year.
“This will give people peace of mind that their monthly payments will remain the same for the long-term fixed period they choose,” he said.
Variable rate borrowers should opt for fixed rates
Brokers said that the base rate hike will obviously impact those on variable rates, and urge these customers to switch to a fixed rate.
Richard Pike, director at Phoebus Software said that the price increases could impact one in five borrowers, or around 800,000 mortgages.
Springall said that the difference between and average two-year fixed rate and a standard variable rate (SVR) is 1.75 per cent. Switching could save around £4,611 over two years based on a £200,000 mortgage over a 25-year term on a repayment basis.
She added that a rise of 0.25 per cent over the current SVR could add around £695 to total repayments over two years.
David Hollingworth, associate director for communications at L&C Mortgages, said: “Borrowers wallowing on lender standard variable rates have the most to gain from a review of their mortgage.
“Not only could they cut the cost of their mortgage and breathe some added flexibility into their monthly budget, but they could also elect to fix their rate to protect against the potential for further rate rises.”
Mark Harris, chief executive of SPF Private Clients, looks at the raise as demanding an extra £250 a year for every £100,000 on a variable rate remortgage, which adds up.
He said that those on variable rates may want to consider long-term fixed rates as they were “particularly competitively priced” but warned that there could be “heft early repayment charges (ERC)” if a borrower wanted to get out of a deal earlier.
‘Stampede’ of remortgage activity
Others said that the decision to increase the base rate to one per cent today could further heighten remortgage activity to a “stampede”.
Simon McCulloch, chief commercial and growth officer at Smoove, said: “Today’s rate hike could see the present rush to remortgage turn into a stampede. We are already seeing a surge in remortgaging.”
He explained that in the previous quarter, legal instructions on Smooves platform had gone up 67 per cent year-on-year and were up 15 per cent on the previous quarter.
“Expect frenzied refinancing and a very busy time for lawyers and mortgage brokers as the rate hiking cycle continues,” he warned.
Pike said that those looking to remortgage could find themselves having to accept a higher rate.
He added: “Brokers could be approaching their clients earlier and advising them to apply for a new fixed rate which will be valid for three to six months, depending on the lender.
“By locking in to a lower rate now rather than waiting to apply when their current deal comes to an end, borrowers should end up with a better deal.”
Harris added that activity in the remortgage market was “brisk” and some borrowers were considering paying the ERC to leave their existing deal early before prices rise even more.
“This can be worth doing but it is important to ensure any savings you make to your mortgage payments outweigh the costs involved. Rates can be booked up to six months before they are required and we are getting a lot of interest from motivated borrowers in doing this,” he said.
Poll: Are you seeing borrowers already struggle with affordability?
Lenders have been updating their rates, changing their criteria and affordability calculators as a result of the ongoing economic environment, which brokers have said could limit the amount certain borrowers could access.
The news that the Bank of England is consulting on the removal or revision of its stress test may provide a solution, but that is yet to be decided on, leaving borrowers to face tightened policies and squeezed incomes for the moment.
Mortgage Solutions wants to know if your customer’s affordability has been impacted by these changes.
Are you already seeing customers struggle with affordability?
Are you seeing borrowers already struggle with affordability?
House price growth slows to 12 per cent in April – Nationwide
According to Nationwide’s monthly house price index, this is the 11th time in 12 months that the annual growth rate has been in double digits.
House prices are up 0.3 per cent month-on-month, taking into account seasonal effects, making it the ninth consecutive month of increases.
However, it said that this was the smallest month-on-month change since September last year.
The report said that the average house prices was £267,620 in April, up £2,308 in the space of a month.
Robert Gardner, Nationwide’s chief economist, said that the current market buoyancy is “surprising” given the mounting pressure on household budgets, comparing consumer personal finance budgeting estimates to “the depths of the global financial crisis” in 2008.
He added: “Affordability has deteriorated because house price growth has been outstripping income growth by a wide margin over the past two years, while more recently borrowing costs have increased, though they remain low by historic standards.”
Emma Cox, managing director of real estate at Shawbrook, said: “The acid test for the market will be the run up to summer. Traditionally a hive of activity, sellers will be hoping for current transaction levels and price growth to prevail. Expectations are that house prices will be shielded from current pressures for the remainder of 2022, with reality perhaps starting to bite in 2023 if current market conditions persist.”
Rising interest rates
Gardner expects the housing market to continue to slow as the cost of living crisis and economic uncertainty squeezes household budgets.
He added that inflation is expected to rise further, perhaps reaching double digits in the quarters ahead if global energy prices remain high and the Bank of England (BoE) raises base rates again.
This was backed by revised estimates in the latest Capital Economics (CE) review, that predicts a five per cent decline in house prices between 2022 and 2025.
The consultancy also warned that the Monetary Policy Committee (MPC) will raise the base rate from 0.75 per cent to one per cent on 5 May, with a hike to three per cent expected in 2023, though other economists put the 2023 figure at two per cent.
However, given the low interest rates at present, some believe that lenders will be able to pick up the slack to remain competitive.
Mark Harris, chief executive of SPF Private Clients, said: “Even though rates are edging upwards, and may again at the next MPC meeting, they are coming off an extremely low base.
“Lenders have plenty of cash to lend and are keen to lend to the right borrowers, although the more house price growth outstrips incomes the tougher it will be on the affordability side to get the numbers to add up.”
Gardner continuted: “Housing market activity has remained solid with mortgage approvals continuing to run above pre-Covid levels.
“Demand is being supported by robust labour market conditions, where employment growth has remained strong and the unemployment rate has fallen back to pre-pandemic lows. With the stock of homes on the market still low, this has translated into continued upward pressure on house prices.”
‘The race for space’ is fuelling market buoyancy
A survey conducted by the lender of 3,000 customers found that over a third, 38 per cent, were in the process of, or seriously considering moving.
Nationwide said that this was “very high” considering that housing stock turnover was typically five per cent.
It added that was higher than the figures for April 2021, which was at the height of the pandemic and when stamp duty incentives were brought in.
The mutual found that nearly half of Londoners wanted to leave the city. The lowest percentage of potential movers was in Wales, but the survey still found that 25 per cent of Welsh respondents wanted to up sticks.
Gardner said the proportion was highest amongst private renters at 45 per cent, but was also heightened for those with a family at 44 per cent and outright homeowners at 30 per cent.
Around 42 per cent of those owning with a mortgage also wanted to move.
It added that 17 per cent of those moving or considering a move said they were downsizing or moving to reduce household spending.
Cox debates this, arguing that poor supply levels will continue to insulate sellers, especially in traditional hotspots.
She said: “The return to city centres after a two-year hiatus and the demand for more face to-face interactions again could reignite the UK’s love affair with cities. The staycation and second home boom in seaside towns also remains steadfast, making quaint British towns a top priority for buyers too.”
Santander lends £9.5bn of gross mortgages in Q1
Gross mortgage lending at Santander, which is the third largest lender in the UK according to UK Finance, varied during the last year, coming to £8.2bn in Q1 last year, £9bn in Q2, falling to £8bn in Q3 and then rising slightly to £8.4bn in Q4.
According to its latest results, the lender’s mortgage loan book came to £180.9bn, which is up from £177.3bn in the previous quarter.
Profit from continuing operations before tax more than doubled quarter-to-quarter from £175m in Q1 2021 to around £495m in Q1 2022.
The lender said that it had made a charge of £18m in Q1, which was due to an uplift in its modelling of likelihood of mortgage default.
“We uplifted our modelled mortgage probability of default as back testing and monitoring shows a risk of model underestimation,” it said.
The largest group of mortgage borrowers was homemovers at 42 per cent, followed by remortgagors at 29 per cent and first-time buyers at 20 per cent.
Buy-to-let made up nine per cent of borrowers, and its buy-to-let balance was £15.7bn, which is slightly up from the previous quarter’s £14.9bn.
Around 46 per cent of its loans were between 50 and 75 per cent loan to value (LTV), and 45 per cent were up to 50 per cent LTV.
The average LTV of its mortgage portfolio is 40 per cent as of March this year, which is in line with 41 per cent LTV at the end of last year. The average LTV of its new business was 64 per cent LTV.
Over half, 59 per cent, of its mortgage loans were up to £250,000, with 30 per cent of loans between £250,000 and £500,000. The average loan size was £177,000 for stock and £237,000 for new business.
South West and London key areas and majority are fixed rates
Under a third, 31 per cent was in South West excluding London, whilst over a quarter, 26 per cent, of its mortgage lending was in London.
This was followed by the Midlands and East Anglia at 14 per cent and the North at 13 per cent of mortgage lending.
Most of its portfolio, 86 per cent, is on a fixed rate, with nine per cent on a variable rate. Only four per cent is on a Standard Variable Rate.
It added that it expected its growth in mortgage lending to be “broadly in line with the market”.
Santander said that increased cost of living would impact its customers and affect affordability of unsecured lending.
It said that to date it “had not seen any deterioration of credit quality”, adding that its unsecured lending and buy-to-let portfolios were “relatively small”.
Santander continued that inflation would continue to impact operating expenses in the coming year, but this could be offset by savings from its transformation programme.
Mike Regnier (pictured), incoming chief executive officer of Santander, said: “I’m proud to be presenting my first set of results, as the new CEO of Santander UK, and feel privileged to have the opportunity to build on the fantastic work of Nathan Bostock, our former CEO, and the team.”
He said that the first quarter had “continued the momentum we built during 2021”, pointing to the growth in profit from continuing operations before tax.
Regnier added that his had been “underpinned by another strong performance in the mortgage market” with £3.6bn of net lending.
“Our transformation programme continues to focus on digitalisation and meeting the changing needs of our customers. This is backed up by our resilient balance sheet and prudent approach to risk,” he said.
Regnier said that households faced rapidly increasing costs of living and it was “ready to support our customers and provide them with practical advice and tools”,
“We have a dedicated team of financial care specialists, reaching out to people who may be experiencing difficulties and have increased online customer support capability. We will explore all options for customers who are facing difficulties with their loan, credit card, overdraft or mortgage.”
Top 10 most read mortgage broker stories this week – 22/04/2022
News around when ground rent changes would come into effect, as well as Building Safety Bill amendments, were also well-read by brokers.
Coverage from The Buy to Let Forum also piqued broker interest. Phil Rickards, head of BM Solutions said that EPC legislation and product volatility would be key challenges for the sector and the lender panel added that key opportunities in the sector would be remortgage, holiday let and limited company lending.
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Lenders reduce loan sizes as cost of living squeezes affordability, report brokers