This week’s comment was sent in by Cameron Orcutt (pictured), chief executive and co-founder of OnLadder and discusses second charge equity loan pricing:
“As we have built OnLadder, one of the aspects of the mortgage industry that has stood out to us is the culture, particularly around the fair treatment of customers.
“As someone who spent the years following the global financial crisis reading everything I could on it, and its causes, it has been encouraging to see how customer fairness has been instilled in the industry’s culture. It makes me proud to be a part of it.”
View on pricing
Orcutt added: “As we have progressed in our journey, we’ve noticed that there is still a disconnect between what the mortgage industry perceives as fair pricing for a second charge equity loan product. Comments assigned to shared equity products include ‘get rich quick scheme’ or even ‘do you take their first born as well?’. The latter was spoken to me by someone (whom I respect) at a recent event and is the motivation for writing this.
“One reason for this disconnect is the culture of customer fairness that has been instilled in the industry, and that any product with a price above a first charge mortgage product is too high.
“Another is the low price set by the Help to Buy scheme which was funded by the Treasury. By not charging any interest for the first five years, and then charging only 1.75 per cent plus CPI, it set an impossible to meet standard.”
The decisions behind pricing
Orcutt continued: “The OnLadder Loan is a unique product, but its pricing is not. The price is not conjured out of thin air, but is determined in a similar way to how specialist mortgage lenders price additional lending provided above the 75 per cent loan to value (LTV) threshold.
“There is a reason that the price charged to a borrower lowers significantly once the LTV dips below 75 per cent, even for deposit-taking mortgage lenders. It’s because the risk lowers significantly for the lender. There is a higher percentage chance they will recover 75 per cent of the house’s value even in the event of default and repossession. This means that lending above the 75 per cent threshold is secured but won’t be considered asset-backed when priced by deposit takers or debt investors.
“To illustrate this, we took a sampling of bank, building society, and specialist lenders’ pricing at 75 per cent, 95 per cent, and the implied price of providing additional borrowing above 75 per cent LTV level. These figures are up to date as of 26 July:
| 75 per cent LTV mortgage rate | 95 per cent LTV mortgage rate | Price of 75 to 95 per cent portion | |
| Building Society #1 | 5.7 per cent | 6.85 per cent | 11.16 per cent |
| Building Society #2 | 6.25 per cent | 7.52 per cent | 12.28 per cent |
| Bank #1 | 6.19 per cent | 7.25 per cent | 11.22 per cent |
| Bank #2 | 6.78 per cent | 6.99 per cent | 7.78 per cent |
| Specialist lender #1 | 7.15 per cent | 8.89 per cent | 15.42 per cent |
| Specialist lender #2 | ***No other specialist lenders were lending at 95 per cent*** | ***No other specialist lenders were lending at 95 per cent*** | ***No other specialist lenders were lending at 95 per cent*** |
“The point of the above chart is to show that the price for providing the financing for 75 to 95 per cent LTV of the home’s purchase is significantly higher than a 75 per cent LTV mortgage product offering regardless of if you are a bank, building society, or a specialist lender. None of us want to charge a higher price to provide higher LTV mortgage products to customers, but to account for risk and cost of funds we have to do it.
“That the price is higher should not be a reason not to provide a product like ours. It’s about whether or not the product is suitable and affordable for the borrower, and that is a discussion that the broker and borrower can have together to ensure they understand the intricacies of the product.
“We need to work together as an industry to avoid a catastrophic drop off in lending to first-time buyers post-Help to Buy. Letting our zeal for customer fairness mistakenly letting us correlate higher price with customer unfairness will lead to first-time buyers across the country unable to purchase their first home unless Mum and Dad intervene.”
