The Bank of England launched a consultation on withdrawing the affordability stress test earlier this year, which states that lenders should ensure borrowers can afford their mortgage if it is three per cent above their reversionary rate.
It said that it would keep the LTI limit, which outlines how much a borrower can borrow relative to income. It typically stands at 4.5 per cent, though lenders can extend this to 15 per cent with new mortgage lending.
The measures were introduced in 2014 by the Bank of England’s Financial Policy Committee (FPC) to strengthen mortgage underwriting standards and guard against increased household debt.
The firms said that current measures were “not fit for purpose when viewed against customer needs”.
They explained that a review of the loan to income (LTI) flow ratio would give specialist lenders opportunities to develop products for underserved markets for those who may need high LTV and LTI products, such as first-time buyers and later life borrowers.
Proposed changes
The companies have put forward two recommendations. This includes implementing the FPC’s proposal to remove the three per cent stress test, and review the LTI ratio exemption to apply to lenders who originate at 2.5 per cent of annual gross mortgage lending
The other is to eliminate the LTI ratio completely but keep the three per cent affordability stress test for loans with a fixed rate term of five years or less.
The companies said that either action would improve competitiveness in the mortgage market, even the playing field for specialist lenders and high street lenders and improve customer choice.
Alan Fitzpatrick (pictured), vice president of lending operations at Habito, said that house prices had “increased substantially” and many prospective homeowners had not been able to keep pace as the “lending landscape hasn’t moved far enough forwards”.
He pointed to research done by the firm, which showed that 54 per cent of UK homeowners had been limited by what they could borrow for a mortgage, even if they could afford to pay more.
“Our affordability recommendations come at a time when interest rates are rising, the cost of living is top of mind and we simply need better and more sophisticated ways to help people finance their homes,” he said.
Arjan Verbeek, chief executive of Perenna, said: “We are supportive of the FPC’s focus on managing excessive leverage and their own assessment demonstrates the affordability measure alone can contribute to it.
“If we want to address today and tomorrow’s challenges with the right level of precision, we believe the LTI flow ratio needs significant amendment or even withdrawal. By doing so, the financial services sector can introduce much needed product innovation and competition.”
The awards recognise exceptional individuals in the mortgage sector. Congratulations and good luck to all the finalists.
Broker
Administrator sponsored by Pepper Money
Amy Baptiste, LDNfinance
Chantelle Haley, Brightstar Financial
Becca Howlett, The Mortgage Broker
Buy to Let sponsored by Paragon
Graeme Lockwood, Alexander Hall Associates
Sy Nathan, Dynamo
Fiona Simpson, The Mortgage Broker
Complex Credit sponsored by Kent Reliance for Intermediaries
Edward Cook, Wilson Cook
Stuart Ockleford, Coreco
Jodi Spreadbury, The Mortgage Broker
First-Time Buyer sponsored by Barclays
Annabel Dixon, Alexander Hall Associates
Tara Panayi, Just Mortgages
Jamie Scott, L&C Mortgages
General Insurance sponsored by Uinsure
Kelsey Harrison, Mortgage Advice Bureau
Anais Middleton, Heron Financial
Gavin Poulton, Just Mortgages
Large Loans
Andrew Chalton, LDNfinance
Nadeen Hall, Mortgage Advice Bureau
Julian Ingall, Coreco
Later Life Lending
Darren Johncock, HFMC Wealth
Matthew Phillips, Age Partnership
Lee Staniford, Equity Release Experts
New Build sponsored by Skipton Building Society for Intermediaries
Adam Davis, Just Mortgages
Shafeen Daya, Alexander Hall Associates
Scott Richford, Mortgage Advice Bureau
Overall
Gemma Pritchard, Countrywide Mortgages
Danny Smith, Mortgage Advice Bureau
Matthew Tilbury, Just Mortgages
Protection sponsored by HSBC Life
Wendy Whyte, First Mortgage
Corey Greenway, Mortgage Advice Bureau
Apurve Kaushik, Allen & Harris
Rising Star – Distributor sponsored by Coventry for Intermediaries
Debra Bowskill, Mortgage Advice Bureau
Gethin Davies, Just Mortgages
George Sanford, Vibe Finance
Business Leader
Broker (fewer than 10 advisers) sponsored by HSBC UK
Adrian Anderson, Anderson Harris
Joe Childes, Right Choice Mortgages
Kim McGinley, Vibe Specialist Finance
Broker (11 to 50 advisers) sponsored by NatWest Intermediary Solutions
Andrew Montlake, Coreco
Anthony Rose, LDNfinance
Sarah Tucker, The Mortgage Mum
Broker (over 51 advisers) sponsored by Bank of Ireland for Intermediaries
Steve Auckland, Age Partnership
Peter Brodnicki, Mortgage Advice Bureau
John Phillips, Just Mortgages
Conveyancer
Nick Chadbourne, LMS
Karen Rodrigues, eConveyancer
Alan Young, Landmark Optimus
Development and Innovation Advocate
Maria Harris, Digital Cat Consultancy
Matt Lowndes, Mortgage Advice Bureau
Richard Merrett, Simplybiz Mortgages
Protection or General Insurance Provider sponsored by Uinsure
Steve Bryan, The Exeter
Louise Colley, Zurich Intermediary Group
Martin Schultheiss, Uinsure
Intermediary Lender (less than £5bn gross lending p.a) sponsored by Sesame
Steve Cox, Fleet Mortgages
John Goodall, Landbay
Charles Morley, Metro Bank
Intermediary Lender (£5bn or more gross lending p.a) sponsored by PMS
Esther Dijkstra, Lloyds Banking Group
Jeremy Duncombe, Accord Mortgages
Chris Pearson, HSBC UK
Mortgage Club sponsored by BM Solutions
Robert Hunt, Paradigm Mortgage Services
Lisa Martin, TMA Club
Martin Reynolds, Simplybiz Mortgages
Network sponsored by Halifax Intermediaries
Rob Clifford, Stonebridge
Ross Liston, Sesame
Toni Smith, Primis Mortgage Network
Specialist Distribution sponsored by Precise Mortgages
Mobeen Akram, Mortgage Advice Bureau
William Lloyd-Hayward, Brightstar Financial
Liz Syms, Connect for Intermediaries
Surveyor sponsored by Mortgage Brain
Matthew Cumber, Countrywide Surveying Services
Peter Hughes, Gateway Surveyors
Simon Jackson, SDL Surveying
Lender
Business Development sponsored by Alexander Hall Associates
Nick Jury, Halifax Intermediaries
Jason Neighbour, Santander for intermediaries
Laura Underdown, HSBC UK
Head of Sales or National Accounts
Nicola Goldie, Virgin Money
Rachael Hunnisett, Skipton Building Society for Intermediaries
Kay Westgarth, Standard Life Home Finance
Operations/Credit Risk
Jon Cole, HSBC UK
Chris Delaney, Santander for intermediaries
Katia Petlitskaya, Clydesdale Bank
Telephony Relationship Manager sponsored by The Openwork Partnership
Alison Hurley, Metro Bank
Ross Macleod, Virgin Money
Achile Mayala, HSBC UK
This wasn’t surprising in itself because I’m fully aware of the quality and robustness of the propositions represented, but given some of the mood music being played around the property market at present, particularly in terms of rising rates and the like, it was heartening to hear such positivity.
Essentially, these firms are incredibly positive about the mortgage market and what they intend to achieve this year. The suggestion was that January had started off relatively slowly for some, but as the weeks have passed, they have been dealing with an increasing level of enquiries which are now turning into applications and completions.
As you might expect, remortgage activity was tending to drive that business, but that’s not to say purchasing isn’t also solid. Evidently, supply remains the biggest issue here but the common sentiment focused on the homes that are coming to market selling in double-quick time.
Purchase demand still prevalent
Perhaps this shows most clearly how the purchase demand that drove our market in 2021 hasn’t really gone away, and that even without any sort of stamp duty incentive – unless you’re a first-time buyer – this is still a market in which people want to buy and move.
Supply levels will of course determine just how much business is written, but it’s also true to say that rates, specifically rate movements, are likely to drive further remortgage activity. Especially given the direction of travel here is upwards.
At present, we are in a changeable situation with regards to rates. Historically, of course, we’re still at incredibly low levels. This is good news for the borrower as is the ultra-competitive market we have, the lending targets that have to be hit throughout the year and the anticipation that due to this, we may not see full rate increases being translated into product pricing.
Rising rate opportunities
Upward rate movements can be used by advisers in terms of marketing activity to existing borrowers, particularly those most impacted by rises such as standard variable rate and tracker borrowers, and those who might be coming to the end of special rates.
In that sense, rate rises – bank base rate (BBR) or swaps – might not be the harbinger of doom some are making them out to be.
Of course, rate rises do often mean rate changes at a lender level. There were certain frustrations expressed at our forum, notably around the short notice periods some lenders are providing when changing rates and pulling products.
On that matter, we appreciate that BBR and swap rates do change and lenders have to react quickly, especially in certain areas where no lender wants to be the last one standing and inundated with business it can’t service.
Rate changes are part of the mortgage ‘game’ and it was clear from our adviser discussion that there are still plenty of opportunities to be secured from a rising environment, however long this might last.
Pricing shifts all the time, but advisers would certainly like to be forewarned and therefore forearmed as much as possible when lenders do make their moves, and they have to accept their own responsibility for managing client expectations in that regard.
After 25 years of paying back the loan to the building society – after often many years on a standard variable rate – the final monthly instalment would be paid, the balance settled and the house owned outright. Borrowers could celebrate with a bottle of bubbly as they studied first-hand the deeds to their property.
Nowadays, things are often very different and don’t provide a reason to open the fizz. Sadly, many people reach the end of the mortgage term with an outstanding balance which they are unable to settle; and a large number can’t remortgage either.
Rise and fall of interest-only mortgages
Of course, the largest single cause of this predicament is the interest-only mortgage. While they came to prominence in the 1980s with the rise of the endowment mortgage, their popularity lasted longer than endowments and the subsequent mis-selling scandal.
While the figures are steadily reducing, the most recent statistics from UK Finance show there were still 908,000 “pure” interest-only homeowner mortgages outstanding at the end of 2020.
The good news is that the number of interest-only loans set to mature by 2027, the second tranche of interest-only loans identified by the Financial Services Authority (FSA) in previous research, shrank by 56,000 in 2020 to 457,000 loans, a fall of 10.9 per cent; but that still leaves an awful lot of borrowers who could find themselves facing a serious issue over the next five years.
Options for borrowers
The sad fact is that, despite all efforts to convince them otherwise, borrowers generally don’t believe their mortgage lender won’t offer to refinance them at the end of their term.
If they have adverse credit, are deemed too old or don’t have the requisite income, then the borrower may simply not be eligible for a term extension. And other lenders may equally be put off as well.
So what are the other options available? Firstly, a property sale. If the borrower has another property which they could sell then they could use the proceeds to pay off the mortgage. If not, then they could sell their home and downsize. However, this option may take many months.
Other options may include using a pension, savings or other investments to raise finance. Unfortunately, many borrowers will simply not have enough (or any) of these in order to make up their mortgage shortfall.
The only real option is to sell up and downsize or rent, but time has run out.
A moment of reckoning will be upon the borrower before they know it. They can quickly find themselves being informed by their mortgage lender that possession proceeding have been started. One frantic phone call to the lender later and they will realise that the mortgage company is not being vexatious, but simply following the procedures it is required to do so by the regulator.
Short-term lending can provide ‘breathing space’
All is not lost, however. In such circumstances, short-term lending can be the solution. The use of a regulated bridging loan can provide much needed breathing space for the borrower to find a suitable solution rather than make a distressed decision. They will then have a window for a broker to possibly find a longer-term finance solution (such as a retirement lending product) or it will give them time – up to 12 months – to sell the house.
At Alternative Bridging Corporation, we come across many such cases. So long as a lender can be assured of the exit strategy, they can act quickly to stave off possession proceedings and keep the borrower with a roof over their heads.
This is just one of many real-life scenarios that bridging finance can play its part in solving and can provide genuine reason for celebration.
Nor is there right or wrong – ultimately choice in the market for brokers and their clients is a good thing; it keeps competition healthy and it means there’s always likely to be someone to meet the needs of a wide range of borrowers.
Is rate still king? It might seem like an obvious yes, but not necessarily. Clients – potentially squeezed by the rising cost of living – are keen to keep monthly repayments down and drive a hard bargain for their adviser to deliver the cheapest rate. That’s understandable, basic psychology makes us lean towards lower numbers where outgoings are concerned, but we know it’s important to consider the whole picture, beyond just rate, when advising clients which lender to commit to for the coming years.
Behind the scenes of funding
There’s currently a lot of liquidity in the market. Whether it’s the ring-fenced banks, access to cheap government funding, increased customer savings during the pandemic, or the wholesale funding market re-opening, many lenders are holding far more cash than normal. In the last 12 months, and with a historically low base rate, many have been able to pull a price lever to increase competition in the mortgage market, which has contributed to the record-low mortgage rates we’ve witnessed.
But there’s more to funding these rates than probably meets the eye. Lenders use diverse funding methods to provide greater stability, consistency and flexibility, usually through a combination of wholesale markets, government funding schemes and in our case, as a building society, a simple business model that uses members’ savings to enable mortgage customers to buy a home.
We balance the income we generate with paying interest to our savers that’s above the market average, but with no external shareholders to satisfy, profits can be reinvested in the business to improve our offering to brokers and their clients, our wider customers and members as well as our technology, systems and processes. We invest in our underwriting and sales team, giving brokers access to both and adopting a hands-on, common sense approach to lending.
This model is more expensive but means we can be more flexible and lend in more purposeful sectors. For example, while others had record-low mortgage rates for low loan to value (LTV) remortgages, we were able to lead with support at higher LTVs throughout the pandemic.
As lenders, though the strategies differ, it’s complementary for the market as it means together, we serve a wider range of needs.
Differentiation benefits the market
The great thing about the market is that not all lenders are the same. There’s room for many different strategies, and while we know it’s important to support brokers with competitive rates for their clients, it’s not just about price. Instead, we aim to add value in other ways, such as seeing cases on an individual basis with no tick-box exercises and computer-says-no handling. We’re told time and again that for many, that’s priceless.
So, while we all work towards the same end goal, the make-up of the products we see every day to reach that goal are far from the same.
