Although post-pandemic lending has stabilised, the removal of the Help to Buy scheme next year and house prices inflating to record highs means some borrowers will struggle to access finance from mainstream lenders.
So this week, Mortgage Solutions is asking: Do alternative home ownership providers have the potential to acquire significant market share from lenders? And could mainstream lenders adopt some of their practices in return?
Danny Belton, head of lender relationships at Legal and General Mortgage Club
The market should always welcome new entrants as competition and innovation go hand in hand, driving benefits for lenders, brokers and borrowers alike. Most of the new lenders are also competing in areas that high street outfits don’t, providing new opportunities for buyers.
Lenders needn’t worry about increased competition – the market remains buoyant, and we’re set for another strong year.
Whether a borrower is best suited to a traditional, more established lender or a challenger bank will depend entirely on their individual circumstances. To assess this, borrowers will need to consult an independent and experienced mortgage adviser who can guide them towards the best deal.
Having said that, there are new lenders and schemes that offer great benefits for those with low deposits, such as first-time buyers. A number of these will need support from lenders to provide the first charge element whilst the new scheme provides the second charge or ‘top up’. One innovative lender who will provide a high loan to value (LTV) first charge loan is Generation Home, who we proudly partnered with just last month.
With the Help to Buy scheme winding down, lenders are currently leaning towards more traditional options, such as 95 per cent LTV lending and shared ownership, whilst they consider how they may support the new alternative propositions.
These new propositions offer good options, but their long-term success will likely only be confirmed with more time and investment.
Nigel Purves, co-founder and chief executive of Wayhome
What we’re really doing is growing the size of the pie, rather than stealing market share from existing lenders.
That’s because the alternative option for most of our customers is to rent.
I think that’s probably where we are slightly different from some of the other startups in our space, who are working with people who would but can’t get a conventional mortgage. Our customers have the right credit requirements, they just can’t borrow as much as they need to in order to get on the housing ladder.
Out of everything that’s out there at the moment, we’re probably closest to shared ownership.
The biggest difference is we buy homes off the open market, then allow customers to part own and part rent so they have far more choice than with conventional shared ownership. We are effectively a cash buyer.
We can buy homes with people that are up to 10 times income and there’s no debt involved, so there’s no risk of negative equity. It’s a very different proposition from a conventional mortgage.
However, I think banks might be able to start lending slightly higher income multiples than they are at the moment. Where new entrants may be lending five or six times income, the larger lenders will start to grab some of that land to compete.
We’re still too new to be able to have an impact on the housing crisis but we want to broaden and deepen our partnerships with brokers to help with that. Our view is that, at the moment, brokers are having to turn away these customers.
But as we build those partnerships out, that will help to build trust in what we’re doing and solidify it as an alternative to the high street.
Vadim Toader, chief executive and co-founder of Proportunity
We don’t think it’s a matter of competing for market share but rather working together with high street lenders to capture more market, to help more people get on the property ladder particularly first-time buyers (FTBs).
The main issues faced by people wanting to get on the property ladder are twofold; insufficient deposit to access a good-priced mortgage as 20 per cent is usually needed, and affordability constraints on their salary.
Deposit-taking banks are restricted in what they can do in terms of affordability as only 15 per cent of their mortgage book can be above 4.5 loan to income (LTI). This is where shared equity schemes like the government’s Help to Buy, or Proportunity’s shared equity loans, meet a need.
Accessing traditional mortgages is good as they come with great mortgage prices, but with the big caveat that you need a large deposit and you’re restricted to 4.5 times LTI which significantly reduces the range of properties you can afford.
Using schemes such as Proportunity enables you to access best LTV mortgages out there in terms of price, and thus optimise your overall cost of borrowing. It also enables you to increase the number of properties you can afford exponentially, while not compromising on your ability to negotiate the price or restricting the type of property.
With these products, lenders work in tandem to solve borrower problems and are not competing for the same segment.
Moreover, schemes such as Proportunity enable high street lenders to lend at increasingly lower LTVs of 85 per cent and below which means less risk for them and a better cost of borrowing overall for the customer.
Sophia Guy-White, co-founder of Generation Home
Homeownership is both an engine for wealth creation and a promise for future financial security. If you’re being told “no” by traditional mortgage lenders, you should absolutely check out those trying to do things differently.
At Generation Home we enable friends and family to provide a deposit boost via an interest-free loan. The deposit boost feature was originally designed to enable friends to help one another buy – because not everyone has parents with piles of cash. By structuring deposit help as a protected loan rather than a gift, it enables a variety of first-time buyers and their diverse support networks to pool together and buy.
We’ve found that friends are willing to be a deposit booster if they get a ring-fenced financial stake in the property. And parents are willing and able to contribute much more towards a deposit if they have assurance that the money will be coming back to them.
Saying that, there are two main reasons one could be better off with a high street lender: interest rate and property choice. The first, and major consideration is the borrowing cost. If customers qualify for a mortgage with a high street lender, they have access to more competitive interest rates.
Secondly, some non-traditional lending will impose restrictions on choice of property. There is a dearth of affordable housing available in the market.
Commercialised equity loans and shared ownership schemes will typically reduce the pool of properties available to customers.
However, established lenders have been incentivised to plough capital into low LTV lending, driven by regulatory restrictions as well as economic motivations. As such, products that serve first-time buyers are considered less attractive, and banks have doubled down on low LTV lending to existing homeowners sitting on handsome amounts of home equity.
It’s doubtful that established lenders are worried about losing market share, given that alternative lenders are expanding market share rather than stealing it.
