Rocketing inflation will induce steeper base rate rises – Maddox
The committee has begun to plan the process of selling UK government bonds, currently held in the Asset Purchase Facility, later this year.
Global inflationary pressures have intensified due to the Russian invasion of Ukraine, with energy price increases at the core. Pressure on supply chains is also being felt due to the war, as Ukraine and Russia are both producers of key imports such as metals and fertilisers. Supply chain pressures are also being felt due the Covid-19 resurgence in China, with their Covid Zero policy meaning many cities have been in lockdown since the end of March.
Inflation continues to rise, reaching 6.1 per cent in February and increasing to seven per cent in March, higher than expected in the February report. Inflation is now expected to reach over nine per cent in Q2, and to average just over 10 per cent at its expected peak in Q4 of this year. This is largely due to the Ofgem utility price cap increase in April, with a further increase of up to 30 per cent expected in the October review.
Looking further ahead, inflation is expected to decrease materially once energy prices stop rising, however the inflation target of two per cent is not expected to be met for over two years.
UK GDP growth has slowed and was 0.1 per cent in February with consumer confidence falling due to the squeeze on household disposable incomes.
The latest Office for National Statistics (ONS) figures continue to show unemployment decreasing, down to 3.8 per cent in the three months to February, however the number of job vacancies in January to March 2022 reached a record high of 1.288 million.
Although we continue to see unemployment decreasing in the near term, it is expected to rise to 5.5 per cent in three years’ time with slower economic growth. Regular pay (not including bonuses) increased by four per cent from December to February, however once adjusted for inflation sat at -1 per cent on the year, showing inflation is causing an overall reduction in regular pay on households.
||Forecast in rates
||One month’s time
||Three month’s time
||Six month’s time
||12 month’s time
||Two year’s time
||Three year’s time
|Bank of England Base Rate*
|Two-year fixed rate**
|Three-year fixed rate**
|Five-year fixed rate**
|10-year fixed rate**
* Using OIS Curve [rounded to two decimal points]
**Based on the swap curve
Due to the continued rise in inflation, markets are expecting further steep increases in the Bank of England base rate with large increases throughout the rest of this year, exceeding two per cent within six months. Markets also expect that the bank rate will increase to over 2.5 per cent within the next 12 months.
Market participants also expect the two-year swap rate to increase further over the next three months and to then flatten out, with the three-year swap rate following the same path.
The five and 10-year swap rates have slowly been increasing, but are expected to remain relatively flat over the next 12 months, then to drop slightly in the next two to three years.
UK securitisation market
Issuances returned into the primary market this month, after an eight-week break due to the geopolitical climate, with four transactions pricings; one from a prime lender and the other three from non-conforming and buy-to-let shelves.
Currently, in 2022, circa £14bn of UK residential mortgage-backed securities (RMBS) paper have been placed into the market compared to circa £7.6bn this time last year, and around £6.3bn in 2020.
Distance from London biggest influence on town’s house prices ‒ ONS
That’s according to new analysis from the Office for National Statistics ‒ based on data from 2019 ‒ which found that for towns within approximately 200km of the capital saw prices drop by around £50,000 average for every 50km further away they were.
The relationship was confirmed as towns located around 18km from London had average house prices of £416,800, dropping to £359,000 for towns 50km away, £288,500 for towns 100km away, and £241,000 for those around 150km from London.
The ONS suggested this distance threshold may represent the furthest people are able to commute to work in London.
The other crucial characteristics influencing property prices were the types of jobs carried out by locals, and the level of income deprivation within the town itself.
A link was found between house prices and the percentage of people in the town employed in higher skilled jobs. Using the skill levels defined within the UK Standard Occupation Classification, for every 10 percentage points of people in jobs in skill level four ‒ classed as those in professional occupations and high level managerial positions ‒ the ONS found average house prices increased by around £20,000.
There was also a strong negative trend, with the proportion of residents employed in skill level two jobs. These include professions such as machine operation, retailing and clerical jobs.
The ONS found that for each 10 percentage point increase in local people working in skill level two jobs, average house prices dropped by around £20,000. However, it noted that this link weakened when higher numbers of people in the town were employed in these jobs.
Rounding out the top three was income deprivation, which the ONS said had a “strong” link with house prices. It found that the average property price dropped by around £10,000 for every five percentage point increase in deprivation level.
The pandemic has changed the game
Andrew Montlake, managing director of Coreco, argued that the property market today is “fundamentally different” to 2019, noting that while proximity to London is still important, the pandemic has “changed the rules of the game” when it comes to prices.
He continued: “London will always be the nexus of the UK property market but with the shift to homeworking and the race for space triggered by the pandemic, proximity to the capital just doesn’t count in the way it used to.”
Montlake suggested that in future, towns that are a greater distance from the capital may begin to outperform “as the race for space continues”.
First-time buyers saved deposits faster during pandemic as spending fell
According to research from The Nottingham, which surveyed 1,023 adults, 19 per cent of respondents planning to buy their first home in the next five years will have deposits saved this year.
When asked where the biggest savings were made, 60 per cent said they spent less on clothes, 56 per cent cut back on eating out and 51 per cent didn’t go on holiday.
Other areas of saving included reduced spend on big food shops at 43 per cent, and 16 per cent said that they had taken on more than one job.
Around a third, 32 per cent, said they planned to view properties this year and eight per cent of first-time buyers said they had started househuntinng.
Over a quarter, 28 per cent, said they expected to start viewing in properties in next two or three years and quarter said they expected to look at properties in the three or five years. The rest said they were unsure when they would start viewing.
Iain Kirkpatrick, chief customer officer at The Nottingham, said: “The restrictions placed on people during the height of the pandemic saw many dramatically cut back on the amount they spent – from eating out, to buying new clothes and holidays.
“Although it has been a very difficult time, for many of those saving for their first home the reduction in their expenditure provided an opportunity to dramatically increase their deposit savings and move a step closer to owning their own home.”
Self-employed mortgage cases needn’t be hard – Saffron BS
I was disheartened to see the results of a broker survey in this article from 18th March 2021, relating to the difficulty of placing self-employed mortgage cases. There are a variety of factors that could be the cause of case rejections.
The pandemic was an undeniably tough period for the self-employed. They faced less financial support from government schemes than the employed. Their businesses were heavily impacted by lockdowns, restrictions, and Covid-19 guidance. Many had no idea what the next day would bring for them.
I wanted to touch upon both issues – the important information that brokers need to understand to submit for self-employed applicants, and how the ‘pandemic year’ of 2020 doesn’t have to be the dealbreaker.
When submitting applications, one big factor that can affect application success is business performance.
When reviewing accounts, underwriters will review the past performance of the business, assess its current state and growth potential when considering the application.
When the government announced it was putting the country into lockdown in 2020, businesses ground to a halt. Without question, this was going to heavily impact the financial results of any business. As brokers are aware, you require three years of business accounts to consider a self-employed applicant for a typical residential mortgage.
The impact of the 2020 accounting year will therefore remain an issue for applicants for a few years to come, depending on the impact on their business. For an applicant who was planning to purchase their home over the next two years, this can or will have devastating consequences on their application.
Not restricted to the self-employed, but across society, adverse credit is a major factor in rejected applications – this has been heightened by the pandemic. During 2020 for example, a higher majority of Brits were late on payments or went deep into or maxed out their overdrafts and/or credit cards.
In a lot of cases, this was necessary to simply survive the uncertainty.
Even discounting the pandemic effects, larger lenders – whose application process relies on technological applications and instant credit checks – will throw up an immediate red flag and, in a vast majority of the cases, reject an application with even the smallest blip on the applicant’s credit file.
One of the financial support packages during the pandemic for the self-employed came in the form of Self-Employment Income Support Scheme (SEISS) grants.
What you may not be aware of as brokers, is that accountants were actively encouraging small businesses to take the grants as a safety net. Many self-employed Brits did – in their tens of thousands – with many not having spent them. Even if they didn’t spend the grant, having applied for it and receiving the money, could or will have an immediate negative impact on their application with some lenders.
Whilst this is pandemic-specific, this can also relate to loans to the business from family or loved ones, or support grants of any nature.
One immediate solution is the specialist mortgage market. Specialist self-employed mortgage criteria differ from standard residential mortgages, allowing greater flexibility and less long-term accounting – if the applicant’s business is in growth and forecasting is strong.
For example, according to some mortgage criteria applicants require one to two years of trading accounts, which is useful for newly self-employed applicants. And this will apply whether they are remortgaging or a first-time buyer.
Every broker will be aware of specialist lenders. Typically smaller, often building societies, that operate very differently from high street brands.
But how do we take full advantage of the benefits of hands-on specialist lenders?
Tell the story
Some of the issues raised around business performance, adverse credit, and SEISS grants could be resolved with just a couple of sentences.
Smaller lenders offer a more holistic approach to applications – with the business development manager (BDM), broker, and underwriter working together on the case. We call this common-sense lending.
- If there is a small adverse on their credit file – tell lenders why. Explain the circumstances. Leave a note and tell the story.
- If there was a blip in the business performance for a month or two, explain why. Maybe it was down to illness or bereavement. Let the lender know. Leave a note and tell the story.
- Did your applicant take the SEISS grant? Why? Was it on the advice of their accountant? Did they use it? Was it necessary for the business? Leave a note and tell the story.
It may seem like this is common sense, but it is commonplace that there is back and forth which slows down the application. Lenders want to give the applicant a fair shot, but if they are in the dark and don’t have the foresight of potential flags on the application, they cannot make an instant decision.
Discounting the pandemic year
It would be a dream to completely discount the pandemic year from accounts when applying for a self-employed mortgage. Well, that dream has become a reality with some lenders.
There are caveats, however. The business must have been trading for a year before the 2020 lockdown and must be showing consistent growth and operating at least at pre-pandemic levels. This is a significant step in improving success for self-employed applicants.
Self-employed applications needn’t be hard
Returning to the title of this article, self-employed applications needn’t be hard. You just need to know where to look. Speak to mortgage clubs, your peers, and BDMs. Search for webinars offered by lenders for guidance too – you will realise help is there.
Brokers, not disrupters, will drive greater tech use – Merrett
This week the Financial Stability Board (FSB) published a report about the financial stability implications of digitalisation during the pandemic, which highlighted the importance of cooperation between financial, competition and data protection authorities.
The report found that the pandemic had accelerated the trend toward digitalisation of global retail financial services and noted the significant developments in digital adoption across all financial products.
While data is scarce, proxies suggest that BigTechs and larger FinTechs have further expanded their footprint in financial services, potentially destabilising the financial market as a whole. However, the report also notes that this isn’t necessarily a bad thing as it brings improved cost efficiencies and wider financial inclusion for previously underserved groups.
How will this trend affect the UK mortgage market?
Richard Merrett (pictured), head of strategic development for mortgages at SimplyBiz, told Mortgage Solutions that while the industry hasn’t seen as much of an impact as other areas of finance, it hasn’t been unaffected either.
He explained: “It is probably fair to say that while the mortgage market has definitely evolved during the pandemic, as a customer journey the mortgage process is not quite where certain other financial products are… yet! For example you can open a bank account taking a selfie or be underwritten for insurance risk instantly using data-driven decisions – for many mortgage providers you still have to print a form and get the customer sign it so there is a level of disconnect.”
Adviser engagement sets the industry apart
Unlike many other services, a lay buyer investing their life savings into bricks and mortar often has no expertise with a lot of money on the table. Most buyers therefore still want personal engagement and advice from trusted specialists, beyond what can be found online, especially with the growing number of more complex cases due to the fallout of the pandemic.
Merrett said that while more borrowers were starting their advice journey online, they would still turn to an experienced, quality adviser for help in finding a mortgage, arguing that the need for good advice has never been more pronounced.
He continued: “Mortgages have become increasingly more complex during the pandemic with sweeping criteria and propositional changes from lenders, set against the nuances of the rising costs of living and interest rates in particular.
“During the pandemic we have seen some excellent development of criteria and affordability tools and the direct to lender application functionality is now making progress, although it requires increased adviser engagement and adoption, so clearly things are improving all the time.”
“Digitalisation and a more frictionless process will clearly be a good thing, and will certainly enhance customer engagement, but I believe this will come from the excellent intermediary businesses we have in our industry utilising more of these tools and using technology as an enabler, as opposed to Big Tech or digital disruptors trying to come in and get the complexities of advice and good customer outcomes right.”
The FSB findings stress the importance of cooperation between financial authorities and, where relevant, with competition and data protection authorities.
It goes on to say that there could be negative financial stability implications from dependence on a limited number of BigTech and FinTech providers in some markets, the complexity and opacity of their partnership activities, and potential incentives for risk taking by incumbent financial institutions to preserve profitability.
It warns that there could also be consumer protection risks from greater dependency on technology and data protection issues. In addition, the limited number of cloud service providers could magnify the impact of any operational vulnerability.
The growth of BigTechs in particular underscores the need to address data gaps that currently hamper the assessment of those firms’ financial risks and systemic importance, since such data gaps make it difficult for authorities to decide whether and how to regulate BigTechs.
The FCA was also approached for comment.
Brokers: Self-employed mortgage clients are hardest to place
According to a poll conducted by the forum, 24 per cent of brokers said mortgages for self-employed and contractor clients were the hardest to place, closely followed by clients with adverse credit.
Cherry’s survey also indicated that 18 per cent had problems placing low income clients, and 14 per cent said payday loans were their biggest headache. Other difficult areas highlighted by brokers included non-standard construction and debt consolidation cases. Cherry did not disclose the sample size for its survey.
Donna Hopton, director at Cherryplc.co.uk, said: “We know that the specialist mortgage market is thriving, with competitive solutions for a range of customer circumstances, yet our research shows that brokers can still struggle to place cases for common circumstances like self-employment, contract work and adverse credit.”
One of the main issues for self-employed borrowers is systematic. Lenders will generally work off the last three months of pay slips for those in traditional employment, whereas with a self-employed person they will look at the finalised accounts.
Greg Cunnington, COO at LDNFinance, told Mortgage Solutions that this difficulty for brokers and their self-employed clients is due to the way the lending system is currently set up, but that this is improving, with specialist lenders making life a lot easier.
He said: “With the finalised accounts of a self-employed person you’ll regularly see the impact of the Covid dip, which are reflected on the accounts even when their business is doing great post and pre-Covid. So you end up with a lot of these very successful clients who are haunted by that Covid-instability for a lot longer and find it tricky to get a mortgage.”
How brokers can tackle this
Cunnington said the main issue brokers faced when trying to place self-employed cases was having to filter through differing loan sizes for each lender.
He added: “It needs a lot more work and time, but I think that’s a good thing because these clients really need an intermediary and that extra bit of advice, which is the whole point of being a broker.”
He said this could be addressed through digital means.
Cunnington added: “As brokers, it’s about using the enhanced technology that’s coming through properly so that the vanilla cases don’t touch the sides. This frees up time so you can use your brokerage teams for cases that are more complex and need that extra care from a broker who can handle these cases properly and ensure the client understands how lenders assess their accounts, what they’re looking for, what they can use, and how best to manage their business accounts to fit best with what lenders are after.
“A lot of bigger lenders need two or three years of accounts, which puts a lot of otherwise very successful self-employed borrowers off, but we know which ones only need one year so we can put them in contact with those lenders.”
Paul Stringer, managing director at Norton Home Loans, said: “Often the right solution for an individual is available from one of the smaller specialist lenders and the cherry forum is a good way for brokers to leverage each other’s knowledge and experience across the industry for free to arrive at the best outcome for their client.”
Lenders need to add a human touch
Cunnington said: “Lenders need to grow their capacity to have more human underwriters to perform manual assessments. There are now a growing number of specialist lenders who will do that for self-employed applicants and there’s a high success rate with that approach.
“Some lenders have also improved their criteria recently too. Clydesdale, for example, works on gross profit instead of the finalised accounts, which can help self-employed clients borrow more than they’d otherwise get.”
Sancus reports £10.3m loss in trading update for 2021
This will be an improvement on the £14.5m loss it recorded in 2020 and follows newly appointed CEO Rory Mepham’s goal to make the lender profitable again.
Sancus is an alternative finance provider that offers bespoke bridging and development finance.
It generated a £9m revenue for the year to 31 December 2021, down on the previous year’s £10.9m, which was below its expectations.
Sancus attributed the revenue reduction to a decrease in the loan book and the impact of Covid on new loans written, which delayed loan closures and therefore caused a reduction in transaction fees.
Its loan book value dropped 17 per cent to £141m annually. This primarily occurred in its offshore bases of Jersey, Guernsey and Gibraltar where the management teams underwent restructuring.
An evaluation of the group’s loan book was completed when Mepham was appointed in January 2021. Particular focus was placed on reviewing historic loans which were either delinquent or had defaulted.
As a result, the group expects to report an increase in its credit loss provisions of £6.5m for 2021, up from £4.7m the previous year.
Almost all of these provisions have been made in relation to legacy loans written in or prior to 2018. The new senior management team have established deliverable strategies for these loan positions, which are now in progress, the group said.
Part of Mepham’s plans to make the lender profitable is to rely on the growth in loans under management. To achieve this, it will expand its presence in the UK and Ireland as well as rebuild its loans under management in its offshore markets.
Sancus made a number of appointments last year, increasing its headcount to 35 at the end of 2021, compared to 25 at the end of 2020.
This has resulted in an increased operating expenditure to £6.2m, up from £5.6m the year before. This investment is expected to support its growth over the coming years.
Brokers urged ‘plan ahead’ as Accord rewards staff with Christmas Eve off
It’s the second straight year in which the lender has done this, which it said was in recognition of their work throughout the pandemic. As a result staff will have a five-day break from the office, returning on Wednesday 29 December.
Accord said it was therefore important for brokers to plan ahead if they were likely to need to contact the lender, as call centres will be closed during these dates.
Jeremy Duncombe (pictured), managing director at Accord Mortgages, said that the “excellent team” had gone above and beyond to support brokers and borrowers during the pandemic.
He added: “By giving this advance notice, we hope this reduces any impact on brokers and helps encourage them to conduct any urgent business with us before the 23rd. I’m sure they understand why we have made this decision to recognise the efforts from our team. We wish everyone across the intermediary market a fantastic festive break.”
Younger borrowers keen to talk protection since Covid – AMI report
A report from the Association of Mortgage Intermediaries (AMI) called Protection: Moving Forward confirmed 40 per cent of 18-34s say they would consider income protection as a result of Covid-19 where they might not have before – twice as many as those in the 35 to 54 age bracket and ten times higher than the over 55s.
The poll of 5,000 consumers and 250 mortgage brokers supported by Legal and General and Royal London also showed 18 to 34 year olds think income protection is just as important as buildings insurance.
The research also showed over half of protection discussions have increased and one in four of those advisers are referring to a protection specialist, up from one in seven last year. Of those asked, 99 per cent of advisers are now raising protection with their clients when discussing mortgages and a quarter are passing them onto protection specialists.
The question of cash
Contrary to popular belief, cost isn’t the main reason consumers don’t buy protection from their broker – most don’t think they need it. However, where 99 per cent of advisers say they raise protection, up to two thirds of clients don’t remember discussing it.
Julie Scott, chief commercial officer at Royal London, said: “It’s motivating to see that nearly two thirds of the mortgage advisers surveyed have noticed an increase in their protection business since the start of the pandemic.
“This has created awareness of vulnerability in society, particularly in relation to health. Consumers now understand that a life shock can happen out of the blue.”
On the optimal time to raise the protection discussion when in front of the client, 30 per cent of advisers raise it at a specific point during the interview where 70 per cent don’t formalise the process.
Emma Walker, chief marketing officer from Lifesearch, said: “It is interesting that brokers choose to raise protection at different points in the advice process and that there is no obvious method that is more successful. Perhaps the most important issue is ‘what’ is said, rather than ‘when’ it is said.”
It appears that context for the conversation also remains key.
Stacy Reeve, senior policy adviser, AMI said: “Our research shows that those advising on a mortgage are in the ideal position to raise protection – for consumers that bought protection cover, a new house purchase was the top trigger for all protection products. So why have such a small percentage of consumers purchased protection insurance via their mortgage adviser given their role in facilitating the house purchase?”
Government support cushions mortgage arrears in Q3
According to the UK Finance arrears and possessions figures, the number of homeowner mortgages in arrears dropped by three per cent to 74,210 while buy-to-let mortgages fell by six per cent to 5,670.
Within the homeowner arrears, 25,110 were in early arrears of 2.5 to five per cent of the outstanding balance. This was a decline of five per cent on the previous quarter and 10 per cent down year-on-year.
UK Finance said early arrears were lower than pre-pandemic levels and although Covid-specific support schemes had ended, continued forbearance provided by lenders would moderate but not prevent a rise.
Also within the total was 27,980 homeowner mortgages which were in significant arrears of 10 per cent or more of the outstanding balance. Compared to Q2, this was up by 70 cases.
UK Finance said borrowers who were already significantly behind on payments before the pandemic would have made use of the support available to catch up, helping to keep the overall figure low.
There were 410 homeowner mortgaged properties and 320 buy-to-let mortgaged properties taken into possession in Q3.
Although this represented quarterly increases of 95 per cent and 39 per cent respectively, UK Finance noted this was only a surge because of the moratorium put on possessions between March 2020 and April this year.
It said the number of possessions would gradually increase as the courts continue to work through the backlog of cases.
Eric Leenders, managing director of personal finance at UK Finance, said: “Mortgage arrears continued to fall to near historic lows during the third quarter of the year, with the furlough scheme and the previous mortgage payment deferral scheme supporting people and even enabling some to pay down existing arrears.
“Following the end of the year-long moratorium on possessions in April 2021, there were a small number of possessions in Q3, however these reflected cases where people were already in financial difficulty before the pandemic.”
He added: “Possession is only ever a last resort after tailored support is exhausted and we expect to see a gradual increase in cases as the courts continue to process those which had been put on hold.”