Lenders now offer higher loans compared to income, while the options for borrowers with a history of bad credit are also growing.
The Bank of England recently warned increased risk taking in the mortgage market could be a cause for concern.
So we asked this week’s Marketwatch panel if the changes in lending are good for the mortgage industry or is history about to repeat itself?
Rob Barnard, director of sales at Pepper Money
In March, the Bank of England issued a warning about the growth in risky lending, stating that there “had been a gradual loosening in credit conditions in the mortgage market in recent years”.
It’s worth noting that the focus of the Bank’s attention was the provision of high loan to value (LTV) and high loan to income (LTI) mortgages.
It’s important to distinguish between this and the provision of mortgages for borrowers whose circumstances mean they don’t fit a standard credit score.
After all, last year the Financial Conduct Authority (FCA) announced that inclusion – where everyone is able to access the financial products they need – is one of its core visions.
We’re living through a period of significant change in the way that people live and earn their money and it’s creating ever-more diverse requirements among borrowers.
This is driving the need for an alternative approach to underwriting, but that doesn’t have to mean a riskier approach.
Today’s specialist market is defined by its ability to cater for customers with more complex circumstances, not necessarily an insatiable appetite for risk.
For example, last year, the most common characteristic of customers who completed a mortgage with Pepper Money was not CCJs or missed payments, but the requirement to consider additional income as part of their application.
We, of course, need to be aware of the dangers of sleepwalking into an environment of overly risky lending, but we also need to defend our market’s role in helping more customers to access the products they need.
Oh how quickly we forget. I feel a bit like Bobby Ewing coming out of the shower and realising that the last 10 years were a bad dream after all.
I recall that in the early years of the credit crunch there was talk of de-risking and deleveraging across governments, corporations and individuals alike.
As it stands today it seems the opposite has happened and the debt markets are bigger now than they were in 2007.
Carrying ever increasing amounts of debt seems to be the new normal and now we appear to be chasing more debt up the risk curve to help see us over the cliff edge.
Still, so long as someone somewhere has ‘smashed a target’ or ‘nailed the month’ it’s all ok isn’t it?
Maybe we should allow two hours of Continuing Professional Development for those people to sit and watch The Big Short.
I am with the Bank of England on this and they are right to keep a close eye on what is happening.
A poor culture can be as much a systemic risk as any lax lending and a lot of what I see, hear and read drives me to believe that a lot of what we are witnessing in the market today is very reminiscent of the bad old days.
It is times like these that I like to quote my favourite 18th century mortgage broker, Georg Hegel: ‘We learn from history that we do not learn from history’. Well said Georg, well said.
Many people with current or past debt problems still need access to financial services, and removing that access could make problems worse for them.
But there is no excuse to return to the bad old days of products that multi-layer risks and charge eye-watering prices relative to mainstream mortgages.
Around 80% of those who seek help from StepChange are tenants, but the 20% who are home-owners include some people for whom remortgaging provides a genuinely sustainable solution.
Where this is the case, that is exactly what our in-house regulated mortgage advisers help them to do.
Some mainstream lenders have helpfully started to consider cases where the credit repair process has recently been completed, such as individuals who have recently come off a debt management plan.
This can help people whose debt problems are behind them, but whose credit score will still be impaired for some time, and who would normally need to pay a price premium reflecting that.
Gaining access to standard rates, where possible, can potentially reduce both their costs and their future risk.
Regulation, especially since the Mortgage Market Review, means that stress-testing future affordability is a prerequisite for new lending so safeguards are higher.
And the requirement to verify income in all cases does at least eradicate one of the more obvious affordability flaws.
But vigilance is definitely needed.
We think that, as lenders develop products, they should always be thinking about safeguarding features that help people to de-risk as they go, and to proactively rehabilitate any existing debt problems to achieve a sustainable financial footing.