The market has rarely been so turbulent or technical; house prices are soaring to record highs with continued lack of supply against overwhelming demand, and some properties are making more money than their owners do annually. Brokers are also seeing more complex cases and specialist lenders are being “forced into the spotlight” as borrowers’ needs become increasingly diverse.
So, this week, Mortgage Solutions is asking: What is the perfect mortgage product, and can it become a reality?
Greg Cunnington, COO at LDNFinance
The perfect mortgage product would be a lifetime fixed rate at two or five-year pricing, no early repayment penalties at any time; no lender fees. How about a 100 per cent loan to value (LTV), all available on an interest only basis, and the lifetime fixed nature meaning affordability can be stretched to 10 times loan to income (LTI)? I can feel lenders beating down the doors to create this masterpiece.
Sounds good right? But the above is a combination of what clients think would be their perfect mortgage product were this an execution-only industry – thank goodness for advice – but the reality is that none of the above would be realistic or possible as a combination. However, elements of all carry true – a mortgage product needs to be priced as competitively and fairly as possible.
In fairness, lenders are doing a great job here, with margins wafer thin right now, but clients increasingly want the flexibility to overpay more, so an increase to 20 per cent of the loan amount from 10 per cent as industry standard would be great. The more products on the market with no early repayment penalties the better, which some lenders already do very well.
The perfect product would be different for every client circumstance. For some of our larger loan clients for example, they love the ability to be able to purchase at a higher LTV but on an interest-only basis with committed bullet repayments to pay the loan down in the initial period, so they like this flexibility. They are also comfortable with an initial short-term product. By contrast, for some clients in settled financial circumstances on basic salaries with no plans to move, a longer-term fixed rate may well be the peace of mind they want.
The key is to ensure we have as much diversity in the products available on the market as possible. Different lenders should play to their strengths and offer different product types, so that as intermediaries we can do what we do best in finding the best option for our clients and their individual circumstances.
Charlotte Nixon, proposition director for mortgages and protection at Quilter Financial Planning
The perfect product is always the one that best suits a client’s unique financial circumstances and therefore there is never going to be perfect product for every type of buyer. However, first-time buyers do all face a very similar problem and one that has been massively exacerbated by the surge in house prices and the cost-of-living crisis.
Young people, or ‘generation rent’, have never faced a bigger battle to get onto the housing ladder and the struggle starts with saving for a deposit. The perfect product for this group needs to address the fact that first time buyers keep getting the rug pulled from under them while they save. House prices surge and the deposit they have been building no longer gets them what they need. The advent of lifetime ISAs and the implementation of other government schemes have had some limited success but we need lenders to build into their products a mechanism of helping buyers with their deposit too.
In theory, if a lender feels that a customer has the ability to pay back a large sum over a long period then there should also be a means of lending a smaller amount for the deposit over fewer years at a higher rate.
The increase in the popularity of guarantor mortgages has helped in this respect but there are still many people out there that don’t have this available to them. More innovation in this space could help shape a product that better suits the needs of first-time buyers that are living in fiscally very different times to when many of the blueprints to the products on the market now were created.
Nick Morrey, technical director at Correco
Borrower’s requirements are extremely broad, so the perfect product would have to be a mixture of both criteria and features.
For residential it would be a dream to have a product that was competitive in price with two, three, five, 10 and 20-year fixed rates that all have early repayment charges (ERCs) for a maximum of five years or opt out clauses for standard sale/reduction/redemption, and flexible with more than 10 per cent overpayment and borrow back facilities – similar to offsetting but not as far as a ‘single account’.
Affordability would be based on affordability only – no income multiple limit, especially for longer termed fixed rates.
The market did have something similar years ago, but flexible choices have dwindled and longer-term rates have never taken off, largely due to long, inflexible ERC periods.
Another dream would be to add some adverse history tolerance but with slightly higher rates and an automatic re-scoring either every year or at the end of the product term. This would enable an adverse borrower to switch to a prime lending product without the need to remortgage the moment they are able.
Lenders may struggle to provide such options, but some were readily available before 2009. Investment in systems and new ideas has almost ceased, potentially leaving the industry ripe for a disruptor with sophisticated, flexible systems to force innovation and investment beyond just rate and criteria tweaks over dividends and stagnation.
Finally, lenders could try and harmonise their legal requirements so a remortgage requires hardly any legal work at all – something like the current account switch guarantee to encourage consumer choice.
