So, this week Mortgage Solutions asked our panel what is missing in the mortgage market and what products brokers want to see in the next coming months.
Choices for first-time buyers will reduce in under four years unless the market responds to the withdrawal of the Help to Buy (HTB) Equity Share second charge scheme.
With HTB accounting for 40-50 per cent of many house builders’ sales this is critical for the government’s house building target as well as the sector.
The situation is compounded because despite a wide choice of 95% LTV mortgages most lenders impose a lower maximum for new build properties, especially flats. To avoid a politically damaging hit to new build sales around the likely time of the next general election it is just as much in the government’s interest as the industry’s to facilitate a replacement for HTB.
A private sector HTB type facility is the solution, but not one limited to the new build sector. This would be healthy for the housing market as it would align the cost of buying new and second hand properties, forcing developers to compete on a level playing field. Like HTB, the equity share should be parri passu (on an equal footing) but, unlike HTB, it would also need to charge interest to be commercially viable.
The reason such a structure makes sense is the huge marginal cost of the top five per cent of a 95% LTV mortgage. Despite the spread between high and low LTV rates falling significantly since 2017 the marginal cost of the top five per cent of a 95% LTV mortgage is still around 20 per cent. This compares with unsecured loan rates for amounts between £7,500 and £15,000 starting at 2.9%.
We have seen more innovation in terms of criteria, and dare I say it, lenders going up the risk curve than I can remember seeing. It certainly makes things exciting for advisers as new opportunities are coming into play, even this week we can see the positive Halifax LTI changes, and of course the real winner here is the client.
However, we are now in a position whereby lenders do not want and cannot compete on rate anymore with margin so low and any further positive tweaks on policy are making credit departments nervous.
As such one arena where actually there is some room to play in is innovation on product.
In my view, an obvious starter point is for more offset options. The likes of Scottish Widows, Accord, Barclays and Coventry offer really good offset propositions and get some very solid business and clients from these products. Some more entrants and enhanced product options here would be greatly received in what is a strong market.
We have also seen some genuine steps in product innovation this year. Santander brought in a one-year fixed rate buy-to-let product which landlords really liked. Some more product innovation for first-time buyers would also be well received. We have also seen some positive first steps in products to help the inter-generational lending market. I can see this becoming a more mainstream part of the first-time buyer market. With increased marketing, education and products hopefully we are not too far away from seeing some strides here.
The UK lending market continues to innovate at a steady pace but some borrowers are still being left behind.
One group of people still being chronically under-served are international investors and buyers. A key reason for this is because those with non-sterling income are being unjustly overlooked because of the moderate additional risks associated with this type of customer.
Many lenders are turning these types of deals away almost immediately without carrying out basic due diligence. This is a mistake.
These enquiries usually come from those with higher incomes, though that income is paid in for example, in US dollars or Euros, rather than British Pounds.
Lenders are still struggling to get their head around this, and will simply turn away deals if the borrower doesn’t receive their income in British Pounds.
This creates a strain on the affordability models used by most lenders because they are not adaptable and capable of measuring the true credit risk of these applicants. Lenders are careful to ensure that if the currency of the customers’ income drops in value against the Pound, there is enough of a buffer to ensure the repayments on the loan is still affordable. However, the buffer they are factoring in is simply excessive.
As a packager, we are also keenly aware that better tech will improve the speed of deals — a crucial advantage when deals are often being rushed through against tight deadlines.
What we would like to see is a greater appetite among lenders to improve the technology they use to measure customers’ reliable income and credit risk. To a lesser degree, this will also help a relatively small but significant number of UK customers who also have overseas income they have been unable to leverage in the past.