Healthy remortgage choice remains in high LTV brackets, say brokers
Despite a 47 per cent drop in deals available for remortgage since 4 March, there are still 1,925 products on the market, according to Moneyfacts.
The lion’s share of mortgages sit between 60 to 80 per cent LTV. Since the beginning of March the number of deals open to remortgage borrowers in this bracket has fallen by 37 per cent from 2,374 to 1,493.
At 85 per cent LTV there remains 207 deals available, after a 63 per cent fall in product numbers from 562. Furthermore, close to 150 deals are still available at 90 per cent LTV and above.
David Hollingworth, director of communications at L&C Mortgages, said: “There is still a broad choice of remortgages available in the higher LTV brackets.
“But we are in danger of talking ourselves into a 60 per cent market by giving the impression to borrowers there are no options for those with less equity who then may not bother to check if they can have a new deal.”
Hollingworth said the stand-out remortgage deals currently on the market were being offered by HSBC because of the bank’s commitment to progressing cases at all LTVs wherever possible.
And where a borrower has chosen a high LTV deal and it cannot go ahead without an in-person valuation the case can be accepted and frozen.
Secure the rate and hang on
Nick Morrey, product technical manager, John Charcol, said despite hundreds of product withdrawals a lot of the best remortgage deals were still available.
“There are more than 100 deals still available at 90 to 95 per cent LTV so my advice to borrowers in that bracket is secure the rate and hang on to it,” he said.
“Lenders are able to pre-approve every other part of the application and then it can be put on hold if a physical valuation is needed. If rates drop they could cancel the deal and go for a new rate. It’s a heads you win, tails you win situation.”
Morrey said all good brokers would be matching their clients’ to products that had completion deadlines suitable for their circumstances before they signed an application.
More lenders likely to follow Nationwide easing remortgage stress tests – analysis
Nationwide announced this week that it was adjusting its approach to stress testing on remortgages that do not involve additional borrowing.
The mutual will now apply a stress rate of one per cent above its Standard Mortgage Rate, rather than three per cent.
This means a change from 7.24 per cent currently to 5.24 per cent, with Henry Jordan, director of mortgages at Nationwide, noting that affordability can be a barrier even for applicants with a clean payment history.
Strange approach to buy-to-let borrowers
David Sheppard (pictured), managing director of Perception Finance, said it was welcome that another mainstream lender was looking at ways it could help this market, but suggested the mutual was being vague about just what a difference it would make in practice.
He explained: “When I put that up against Santander who have said they will look at lending up to 5.5 times income in this situation, and have been doing so since June, Nationwide have been more coy in this change.”
Sheppard also said it was surprising that this new approach will not apply if the borrower has any other mortgaged properties, given its active presence in the buy-to-let market through its The Mortgage Works brand.
“That is one aspect of this criteria that I feel needs to be changed as if the borrower can afford their current residential mortgage payment with any other properties that are rented out, that situation is unchanged,” he continued.
It’s about time
Paul Flavin, managing director of mortgages.online, said it was a “constant cause of frustration” for clients with good credit ratings who have never missed a payment to have no option but go for a product transfer or move to the lender’s standard variable rate because a change in circumstances left them unable to pass stringent stress tests.
He continued: “As long as the client has a great credit score, is seen to be efficiently controlling debt ‒ for example, they are not using debt to meet income shortfalls ‒ then why should they not be able to move to any chosen lender on a pound-for-pound basis?”
Flavin argued there should be an “industry agreement” that like-for-like remortgages are assessed at a different level to those looking to move home or capital raise.
He added: “Making this lighter assessment available to those with a proven track record, giving them full access to the open market rather than forcing them down the product transfer route, seems so much fairer.”
Time taken on legals is too long
Jane King, mortgage adviser at Ash Ridge Private Finance, noted that FCA guidance on mortgage prisoners allowed lenders to relax their rules on like-for-like remortgages, and suggested Nationwide was simply rolling this out for everyone.
She said she expected more lenders to follow suit, though noted that some lenders had been somewhat lukewarm in their response to the FCA guidance.
King continued: “The biggest issue I face when doing a switch of lender remortgage is the amount of time it takes to do the legal work. If they could cut this down it would be very useful. Currently I am looking to do a switch of lender remortgage at least eight weeks in advance just to cope with the legals.”
A common sense approach
David Hollingworth, director of L&C, agreed that the regulator’s push to provide help to mortgage prisoners had encouraged lenders to “put some common sense approaches in place” for borrowers switching on a like-for-like basis.
Hollingworth predicted that other lenders will follow Nationwide’s lead given the competition in the market, adding: “It’s not abandoned the need to stressing of payments altogether but by pitching them at a lower level it should help more borrowers reach the affordability requirements.
“That may help some mortgage prisoners although it doesn’t rely on the payment simply being at a reduced level and still applies a stress test. However, this should help more borrowers meet the required affordability test and improve acceptance rates for remortgage borrowers.”
Brokers ‘never been more important’ as lender and product complexity grows – analysis
Competition in the market has meant that advisers are faced with a vast number of products to choose from, with regular criteria changes to keep on top of too.
But far from feeling overwhelmed at the array of deals on the market, intermediaries have argued this situation ultimately demonstrates the value they can offer to clients.
More choice, the better
Jane King, mortgage adviser at Ash Ridge Private Finance, emphasised that a wide range of choice on mortgage deals was beneficial, as “clients come in all shapes and sizes and the more choice we have, the more likely we are to be able to find the right mortgage”.
David Hollingworth, director at L&C, said the level of competition in the mortgage market currently was pushing lenders to be more creative, leading to innovation in product design.
He continued: “There’s benefits for customers but also for brokers in giving a better range of options and increasing the possibility of finding a good fit for clients, even where their circumstances may not fit with the mainstream.”
David Sheppard (pictured), managing director at Perception Finance, agreed that the more products there are on the market, the better outcomes advisers can find for their clients.
However, he did suggest that the “constantly changing criteria” ‒ particularly if these changes are not updated comprehensively on lender websites ‒ can mean that a deal which the broker thinks will easily be approved ends up being turned down.
Sheppard suggested that lenders are not solely to blame for the “ever changing landscape” either, arguing that it is often driven by government and intervention from regulators.
“A well regulated mortgage market is good for us all, but where it becomes oppressive it is not healthy,” he added.
Finding the right deal
Sheppard said that while his firm utilises a number of tools to help establish the right product for their client “no amount of technology can make up for speaking to lenders and seeing what will work”.
He added that it was not usual for lender contacts to get in touch to clarify that they will look at cases if there are certain strengths to it, even if it does not fit with headline criteria.
James Mole, managing director of London Belgravia Wealth Management suggested brokers were becoming more reliant on technology to help sort through criteria “but I do think it’s a marriage between market knowledge in your head and technology”.
Hollingworth agreed that while sourcing and technology can help “narrow the field” when sifting through deals, “advisers will still need to have that knowledge and experience to know when an enquiry that, on paper, would be declined may actually be acceptable to an underwriter”.
King said she does an affordability and property check first in order to weed out the lenders who cannot help her client, and then goes from there.
She continued: “I use my research software but always read lenders’ new emails and will always check directly that they are not offering an exclusive of some sort before proceeding. I think it is essential we use technology both as evidence of research and to save us time.
“When you have been around for as long as I have you sort of know what lenders you can use and who you can’t.”
Brokers have never been more crucial
Hollingworth pointed out that one of the many reasons borrowers go to brokers is so that they can help them work through the haze created by the vast number of product options.
Sheppard added: “The job of a broker has never been more important with the myriad of rates and complexities in the market. It is that complexity that means we can thrive even though it would be nice to have more simplicity sometimes.”
London & Country teams up with Comparethemarket.com
Borrowers shopping for a new deal on Comparethemarket.com will be able to access L&C advisers who will be on standby seven days a week.
Customers will be able to request a call back from an L&C adviser.
Mark Gordon, director of mortgages at Comparethemarket.com, said: “This partnership will help customers to save on costs associated with taking out a mortgage and will help to simplify the application process.
“With dedicated customer advisers on hand to help applicants navigate the journey, aspiring homeowners can expect advice and recommendations when renewing their existing deal or purchasing a property. This partnership is a win-win for consumers looking to save time and money when applying for a mortgage.”
David Hollingworth (pictured), associate director, communications at L&C, said: “With lending criteria playing as important a role in the mortgage search as interest rates, L&C will help Comparethemarket.com’s customers find the right match for their needs and save them money on what is likely their biggest household outgoing.”
Stress-test benefits boost take up of five-year deals – Poll
More than 40 per cent of respondents said they had been advising ‘a lot more’ five-year deals than two-year deals due to the borrower’s affordability needs. A further 23 per cent said they had been recommending more five-year deals but only marginally.
Brokers said that while five-year deals offered by some lenders have more lenient stress tests, it should not be the only reason for the recommendation.
Matthew Arena, managing director of Brilliant Solutions, said: “Borrowers on the cusp of meeting a lender’s affordability criteria may need to opt for a five-year fixed rate to get the finance, which could account for the rise in five-year recommendations. But what a borrower needs to do in order to get a mortgage may not always be in their best interests.
“The adviser must take into account all the borrower’s circumstances before recommending the deal, and not fall into the trap of being an order taker. As long as the deal is still appropriate for the borrower, a five-year deal can be useful for its affordability benefits.’
Your Mortgage Decision director Dominik Lipnicki said his team of advisers were recommending a lot more five-year fixed rates than two-year deals, but it was not because borrowers may be able to get a lower stress test.
“Homeowners want a five-year fixed rate because they are looking for stability and less risk over the short to medium term,” he said.
Lipnicki said he thinks one of the biggest responsibilities advisers have is to make sure borrowers understand the current low rate environment is not normal.
“You have a generation of buyers who have never known interest rates to be higher than they are now,” he said. “It is our duty to tell them how exceptionally low they are, particularly five-year fixed rates. A significant increase could have a big impact on their budget.’
Spoilt for choice
Five-year fixed deals are currently in abundance. Last month, analysis from Moneyfacts revealed that 1,542 five year fixed rate mortgages were on the market, nearly twice the number available five years ago.
Furthermore, fierce competition for borrowers among the high street banks and a fall in the swap rates for five-year money has seen the cost of deals tumble.
The difference between the cheapest two-year deal from NatWest at 1.21 per cent and the cheapest five-year deal from TSB at 1.54 per cent is now just 0.33 per cent, according to Moneyfacts.
David Hollingworth, director at L&C, said: “The margin between short and medium-term rates has become so narrow that borrowers are increasingly attracted to the greater security of a five-year fixed rate. With an uncertain political and economic outlook that preference for security is only increased.”
Hollingworth added that while taking advantage of lenders’ different approaches to stress testing can be helpful for borrowers using a five-year deal, there is a risk that some may select a product based on what they can borrow rather than focusing on whether it is the right deal for them.
“For advisers it’s important that the affordability element is not the primary focus and that customers are opting for a longer term deal for the right reasons,” he said. “Most fixed deals will tie the borrower in throughout the fixed rate period so the consequences of locking in for too long could be a substantial early repayment charge.”
‘Restricted’ range of shared ownership lenders must change ‒ analysis
The concern was raised as part of Shared Ownership Week, a campaign to raise awareness of the scheme that runs to 25 September.
Shared ownership is expected to be the chief beneficiary of the withdrawal of Help to Buy, while there may be work to do in ensuring that buyers are aware of how it could help them.
More affordable choice
Jane King, mortgage adviser at Ash Ridge Private Finance, said that given it has been running for decades “it still amazes me how few buyers know about shared ownership.”
However, with Help to Buy being phased out, she suggested shared owners “will garner more publicity, especially with regards to resales ‒ many people believe you can only purchase new properties”.
King emphasised that shared ownership has strengths over Help to Buy even in the current market, depending on where a purchaser is looking to buy.
“In some parts of the country such as London and the South East, Help to Buy was not much use as affordability was still an issue and so shared ownership was the more affordable choice,” she said.
Varied levels of understanding
David Hollingworth, director at L&C, pointed to “a varied range of understanding,” over how shared ownership works, which depends on whether buyers have had much dealing with the housing association.
He added that this is where brokers have to take on an educational role in explaining how the mortgage works.
“Some may assume all deals are on offer whereas others may think that they can only use deals specifically tailored to shared ownership,” Hollingworth said.
Dilpreet Bhagrath (pictured), customer experience manager at Trussle, said that it was important for brokers to have in-depth conversations with borrowers about shared ownership and what it entails, because “customers won’t always understand the ins and outs of a government scheme”.
King said that there were still “only a handful of lenders” active in the market, though she welcomed that large lenders such as Virgin Money had spotted the opportunity.
The lack of choice is unhelpful, though, with “current borrowers restricted to a few large lenders and handful of smaller mutual building societies”.
Hollingworth suggested the number of lenders “is broad enough to give a good range of options,” though he admitted surprise at how many were not active in shared ownership.
Bhagrath argued it would “be great to see more lenders in the market,” particularly if they addressed under-served groups such as those with adverse credit histories.
“The government and industry need to work together to make home ownership more accessible,” she said.
“Developing innovative solutions and mortgage products to help under-served groups in the mortgage market is crucial to making this happen.”
Support for staircasing
Brokers anticipated that the withdrawal of Help to Buy would boost shared ownership.
“As Help to Buy is phased out, certainly there could be even greater emphasis placed on shared ownership as a way for stretched first-time buyers to step onto the ladder and to hopefully use it as a springboard to full ownership in years to come,” Hollingworth said.
The government’s attempts “to inject more flexibility into staircasing,” showed that it was seen as an important part of the housing mix.
“How that will feed through in practical terms will have to be seen of course,” he added.
Bhagrath urged government to ensure that staircasing changes were financially beneficial for borrowers.
“It’s important to remember that there are extra costs involved with remortgaging to purchase additional shares of a shared ownership property.
“Waiting to buy a larger share in the property, as opposed to buying in one per cent chunks, could avoid paying more in fees,” she added.
Sainsbury’s looks to sell £1.4bn mortgage book – reports
On Saturday The Daily Telegraph reported that the supermarket had been in discussions with advisers about a potential sale and that it could recoup an estimated £1.3bn.
It added that exploring the sale was part of a wider review of the financial services arm, which saw profits drop 55 per cent to £31m last year, according to its annual report in June.
Sainsbury’s completed £1.1bn in new mortgage lending in 2018 and its overall loan book stood at £1.4bn, with net interest margin cut by a full 1.1 per cent to 3.8 per cent as the competitive market took hold.
It re-entered the mortgage market in April 2017, having withdrawn its previous offering in 2004.
A Sainsbury’s Bank spokeswoman said that the company would not comment on market speculation.
Such a move would mirror fellow supermarket Tesco which exited the mortgage market by completing the sale of its loan book to Lloyds Bank earlier this month for an estimated £3.7bn.
Will still recommend products
David Hollingworth, associate director communications at L&C Mortgages, noted that it was increasingly hard for lenders to keep up in the highly competitive market.
“They have been extremely competitive in the past, but lenders are finding it hard to keep up with the big banks pushing rates down,” he told Mortgage Solutions.
“Sainsbury’s current two-year fix is 1.6 per cent while HSBC is at 1.24 per cent. They are not pulling out but, it’s just very competitive and hard to keep up in the current environment.”
Hollingworth added that he had not seen a change in rate activity or broker communications from the lender.
“Sainsbury’s has had ambition and is only just a recent entry, but they have been a really good entry and had some excellent rates,” he said.
“We won’t be ruling Sainsbury’s out for product recommendations.
“It brought a very strong and well-known brand, but this market is pretty ferocious and if lenders are too far off on price they can very easily see volume drop,” he added.
Mortgage SVRs remain a ‘major factor’ but many borrowers are not interested – analysis
Customers do still revert to reversion and standard variable rates (SVRs) in certain circumstances, and so this remains a key part of the advice process.
Dominik Lipnicki, director of Your Mortgage Decisions, says: “The client’s expectation is that they will be moving at the end of the introductory period so whatever happens after that is pretty immaterial for most clients.
“But you could be made unemployed, your credit history could turn against you or we might have another crash in the housing market where loan to value becomes a huge issue and people could be in negative equity and unable to remortgage elsewhere.
“As an adviser, you should really be discussing what happens when a rate ends and if the client was unable to remortgage, but I fear that not many consumers are that interested,” he says.
Deals, deals, deals
In some cases, brokers are firmly focused on delivering the deals that clients want.
Chris Bailey, mortgage coach at Mojo Mortgages, says: “We calculate the true cost of deal for the customer on the deal period only. Throughout the process we appraise the whole market, constantly, for our customers.
“They know all their options and they are very much aware of the immediacy of the reversion rate,” he says.
However, other intermediaries have seen situations where clients slipped onto reversion rates owing to a change in circumstances.
Alastair McKee, managing director of One 77 Mortgages (pictured), explains: “The classic example is a client who took out an initial two-year fixed rate and 18 months later went self-employed. Most lenders won’t touch them until they have at least 12 to 24 months of signed accounts meaning their only option is to stay with the existing lender and their retention rates.
“Added to that, you’ll get some clients that leave things to the last minute and therefore don’t realistically have the time to remortgage to another lender and therefore a retention rate is the only viable option for them.
“All good brokers will always compare the retention rates for a lender to the open market rates so yes, they do play a major factor in the consideration of the client’s rate,” he adds.
Dangerous apathy to rates
While advisers’ focus is strongly driven by customers’ concerns about monthly repayments, brokers equally have a role in guiding borrowers’ thinking.
Lipnicki continues: “Borrower apathy to rates is immense and that’s hugely dangerous. Plenty of borrowers have never been in a situation where rates were higher, because they’ve only had a mortgage for the past 10 or 11 years and they’ve never seen it before.
“Plenty more do not remember the early nineties when mortgage rates were 15 per cent.
“People take it for granted and think that if the rate rises it will be tiny, because that’s what they’ve seen over the last few years. But of course we have plenty of potential dark clouds ahead of us with possibly Brexit, a possible global economy slowdown, the housing market and how expensive it will be to borrow money.
“Borrowers should think about the future by looking at the past and not just expecting rates to be at a low, because it’s far from certain that that’s where there will be,” he adds.
Rates go up as well as down
When the base rate plummeted following the financial crisis, lenders with lower reversionary rates were caught out.
David Hollingworth, London & Country Mortgages, associate director, communications, recalls: “When base rate did plummet, there were issues with some of the lenders that had low variable rates, because they’d never foreseen that base rate would come down so significantly. So some were unable to maintain the tracking margins they’d previously suggested they would, and used exceptional circumstances.
“Nationwide was two per cent over base maximum, but that was in the days the base rate was five per cent plus. Suddenly it was 0.5 per cent. They did honour it, but they had to remove it from new business products.
“So there are other issues that lenders have to be mindful of in terms of how they might enhance those follow-on rates.”
Spread of SVRs
Hollingworth also notes that there is a “substantial variance” in standard variable rates (SVRs) between lenders today.
“Some lenders’ SVRs are in excess of six per cent, whereas the likes of Nationwide, NatWest and Halifax are all coming in at 4.24 per cent. You’re looking at a range of around two per cent.
“You can’t just rule it out, but where you have two deals that are not identical, it’s a difficult balance whether to pay more on the first five years of the fixed rate, which is the functionality that you’re really interested in, because you might have a lower ongoing rate that hopefully you’ll never have to pay.”
“But there are instances we can point to, Northern Rock borrowers for example, who have unfortunately been left with little or no choice.
“Therefore the reversion rate should be inconsequential, but ultimately if two deals look pretty much identical and one has a lower reversion rate, all other things being equal, you’d suggest that is the better approach,” he concludes.
Intermediaries split on including lender funding in advice ‒ analysis
Recent months have seen a succession of lenders announce successful securitisations, including the likes of LendInvest, Belmont, Kensington and Pepper Money. Just this week Bluestone raised £210m of funding through its inaugural securitisation.
Lenders have also been known to trumpet other funding lines they may have established, such as The Mortgage Lender with TwentyFour, and Landbay with an unnamed institutional investor.
Tesco Bank’s decision to sell its mortgage book has also raised questions about what happens to a borrower when their lender elects to parcel off part ‒ or all ‒ of its lending to investors.
But should considerations of a lender’s funding model come into the advice equation?
Focus on rate
David Sheppard, managing director of Perception Finance, said that he was unconvinced that brokers are too focused on any likely securitisation when recommending particular lenders or rates, arguing the brokers’ role is to secure the most appropriate rate “taking into consideration all the facts on the case”.
He continued: “Ultimately, even if the lender does opt to securitise their mortgage book then the terms of that mortgage will be unchanged for the borrower. It would be impossible for any broker to second guess what a lender may be planning, as evidenced by the news about Tesco Bank.”
Clients left in the lurch
James McGregor, director of Mesa Financial Consultants, suggested that it is important for advisers to keep funding lines in mind when working with clients.
He said: “As we have seen through the last recession, when lenders stop operating as lenders it can have a huge detrimental effect on the client, for example leaving them unable to switch to cheaper options or to remortgage away.”
McGregor suggested it should be “high on the agenda” for brokers, adding: “As advisers we want to make sure lenders will be there for our clients for the full term of the mortgage.”
At the back of a broker’s mind
David Hollingworth, director of L&C, said that it was difficult for brokers to assess how secure a lender’s funding line may be to the extent that they would ever rule out their products.
However, he added: “With a fiercely competitive market and some lenders withdrawing from the market, such as Magellan and Secure Trust, it may be something that sits in the back of the mind of advisers, especially if they are looking at two similar deals.”
Hollingworth also pointed out that it was likely that lenders would continue to publicise details around securitisation and agreement of new funding lines “and it certainly shouldn’t do any harm to broker confidence”.
Funding not important
Andy Wilson, founder of Andy Wilson Financial Services, said that he had “very little interest” in knowing how lenders are getting their funds together.
“It’s largely irrelevant; as long as our clients are granted the mortgage they are promised then it is of little consequence to us or them where the mortgage money originated from.”
He continued: “If a lender says it will lend, I do not believe we can know with any certainty the source of the funds, and nor do we need to.”
Brokers welcome inter-generational options but want more high LTV deals ‒ analysis
Data released by Defaqto this week revealed that there has been a 40 per cent growth in inter-generational mortgages over the last two years, deals which involve a parent or grandparent offering some form of security deposit whether through their savings or their own property.
It found that in total there are 13 lenders now offering a form of inter-generational mortgage, and this follows a report from the House of Lords back in April which suggested the FCA had a “key role to play” in promoting the development of more inter-generational deals.
Handing over the deposit instead
David Sheppard, managing director of Perception Finance, said he has not seen a huge demand for this sort of mortgage of late, and suggested this may be a result of parents and grandparents feeling more comfortable simply gifting the deposit.
He continued: “We have also seen a few family members look to lend the money for the deposit and use NatWest or Santander for their flexibility in this regard. This is an area that could benefit from a bit more competition from other lenders in my view.”
Sheppard called for more lenders to provide a family offset mortgage, where the borrower still puts down a traditional deposit, but the parents can link their savings pot with the child’s mortgage in order to reduce the balance upon which interest is paid.
He continued: “The money could be ring-fenced from the borrowers and instantly available to the parents should they need it, but would reduce the term of the mortgage with lower interest charged, which would be especially good with some clients taking longer term mortgages these days.”
Family support can be stretched
David Hollingworth, director at L&C, said these were “really useful products to have”, though noted that gifting a deposit remained the main way that parents will look to help their children get onto the ladder.
However, he added: “Rather than gift the cash, these products are a way for parents to help their child achieve their aim but retain ownership of the money. With multiple children, that might help at a later date.”
Hollingworth highlighted that the options around joint borrower, sole proprietor have “gained a bit of momentum” as another way for parents to help, due to the additional rate on stamp duty.
What about high LTV deals?
Sebastian Riemann, financial consultant at Libra Financial Planning, suggested that more high LTV deals, coupled with a cooling of house prices, would be more effective in helping first-time buyers than inter-generational deals.
However, he noted that there has already been a “significant increase” in high LTV deals, with lenders taking reduced margins.
“I’m not sure there is much scope to improve on these further. You could find that irresponsible positions are adopted by some lenders similar to what we saw in 2006/7. If there is no profit in offering particular rates or the risk taken to accommodate these is too high you simply end up building an unsustainable bubble yet again.”
Perception Finance’s Sheppard agreed that high LTV deals would be more helpful, but admitted: “I do not think there is much interest to go higher than 95 per cent LTV in the market right now, especially with the added regulatory burden this would bring to lenders”.
L&C’s Hollingworth noted there was a “good selection” of rates up to 95 per cent LTV now, but added: “So often the case is they can only afford to borrow so much, and the deposit they need then gets bigger as they are trying to bridge the gap with the purchase price.
“That’s where you still have parents often intertwined with the aspiration of the child to buy.”