Over recent years the mortgage market has been defined by its propensity for continual change and movement. All the evidence would suggest that this trend will continue thoughout 2006 and beyond.
This year the industry has been following with interest the imminent arrival of new entrants to the specialist mortgage market place. These businesses range from brand new players backed by big name investment banks, to a number of prime, high-street lenders looking to develop their non-conforming offering.
This movement has created an innovative and highly competitive market, which is great new for customers and indeed brokers. In fact, brokers themselves are being encouraged to embrace the opportunity to move into the non-conforming market, as there are still great opportunities to be had.
Tough environment
The increased competition and tough environment has meant lenders are faced with making some tough strategic decisions. Lenders have a real challenge in finding innovative ways to build, grow and develop their business. Clearly there is a need to ensure the current product range is as competitive and attractive as possible. This means regular product reviews are needed in order to keep the portfolio fresh and appealing. In addition, lenders need to be sure their service levels are meeting and if possible exceeding their customer’s expectations. What can existing non-conforming lenders do to maintain and build on their current market position?
One strategic route available is diversification. This has been adopted in other areas of the marketplace; for example, many packagers now offer a range of additional services including conveyancing and insurance solutions. Some packagers have even looked to develop this further and have reinvented themselves as lenders focusing on product design.
Companies deciding whether to move into a new market must consider the nature of the business in terms of capital intensity, purchasing behaviour, the competitive characteristics of the market as well as a host of other factors.
Rewards, results and risks
Diversification has the potential to deliver some great rewards and results; however, it is a strategy that is not without risks. Moving into an unfamiliar market or choosing to offer a product or service that is new to you needs careful thought and planning. It is not simply a case of looking at an attractive market and diving straight in.
We have diversified our portfolio in a number of ways. Firstly we have extended our product range within the specialist market. We have broadened our reach and developed new and innovative products to appeal to our existing channels. In addition, we have recently extended our product reach with a pilot launch of a prime mortgage range. This is clearly a significant move for us with good growth potential, and when you look at it in context, the logic of moving into this arena is pretty clear.
The decision by a number of prime lenders to move into the specialist market has been well documented. It has resulted in the boundaries between prime and non-conforming providers becoming less clear as the overall cross-over between the two markets has increased. The promise of a buoyant market and attractive margins is clearly a motivator for prime lenders. However, sophisticated underwriting criteria and the increased use of affordability models means specialist lenders are in a position to offer something different in the prime space compared to what is already available in the high-street. Larger, more experienced companies can use their size and experience to branch confidently into new areas without neglecting their core markets.
When looking at entering into new markets it is vital that a demand for your product has been identified. Researching your market is critical. The prime market is extremely competitive, but we talked to our brokers and key partners to ensure our offer matched what brokers and customers need. We also carried out extensive research within the market to support this. We found that in particular, there is a real demand for affordability based prime mortgages, as many brokers feel there are limitations of conventional income multiples. We therefore decided to launch with the established affordability model.
A clear strategy
It’s important to have a very clear strategy with regards to what you actually hope to achieve through diversification. For larger companies, it makes sense to broaden your product range and to look to offer as wider portfolio as possible. While for us, it was not about moving away from the established product range, but building on this success and looking at ways in which we could improve and broaden our product offering to our brokers. We have moved to create a broad and competitive offer that allows intermediaries to meet the diverse requirements of an increasing number of customers that come their way. This pilot in the prime arena reflects, not a move away from the core non-conforming market, but rather an appetite to expand the First National range beyond its traditional strengths.
A launch into a new market can be a high-risk and a daunting prospect. A pilot launch can make all the difference between a gut feeling and a real market opportunity. A pilot launch enables you to iron out any product or service issues and ensure you are fully able to support a complete launch of the product to the market place. While you may have done research and feel confident the market is ready for you, a pilot run may uncover a number of modifications that will ultimately mean you have a more suitable product for an overall launch.
What is evident is that diversification can be a very powerful strategy. Focused research, planning and ensuring your product brings something new to the market can provide long-term success.
