At the start of 2006 the specialist lending market is enjoying much higher market confidence than it was this time last year. 2005 closed, largely thanks to a strong second half, with record gross lending, strengthening housing market activity and increased mortgage lending. Strong pipelines carried into 2006 combined with mortgage approvals continuing to rise has given the intermediary mortgage market a far more positive start to 2006 than was predicted this time last year.
It appears that lenders and intermediaries alike have been able to shrug off their post-‘Mortgage Day’ blues and are now far more settled into a regulated mortgage environment. Moving forward, the Financial Services Authority (FSA) will continue to focus its activity by carrying out themed reviews of business that it deems higher risk, such as lifetime and non-conforming. With recent comments emanating from Canary Wharf I wonder if 2006 is the year in which we might see the first high profile enforcement action in the mortgage industry.
I think we’ll also see the FSA start to ask more questions of those lenders and intermediaries not taking ‘Treating Customers Fairly’ (TCF) as seriously as they should, as there is no doubt TCF will be high on the FSA’s agenda during 2006.
Within the specialist lending market as a whole regulation will continue to take up a lot of our time. However most of the wrinkles we saw within the first year of regulation have now been ironed out. But intermediaries will need to have a clear voice to make sure their opinions are heard, so it’s likely that the Association of Mortgage Intermediaries (AMI) will grow in stature as the industry body to listen to.
Distribution
‘Mortgage Day’ brought about much speculation that we’d all see the demise of packagers – all those who made that prediction will continue to be proved incorrect. Although one wonders if by the end of the year the packaging community would benefit from one strong trade body to represent them. Sensible lenders that want balanced distribution will continue to support packagers who in turn will continue to add a useful dimension to the distribution landscape.
When it comes to online, those lenders who still do not offer online transactions are at a serious, if not near-terminal, disadvantage. Where once online offerings were the exception they are now the norm and have become embedded in the day-to-day working practices of the whole industry. The role that the web can play for lenders has been highlighted by those who have launched online systems and managed to significantly increase their business volumes without changing their pricing. A high quality online service is now expected by intermediaries and lenders are trying to advance the sophistication of their offerings. Of course, technology sometimes fails us so we can expect lenders to continue to pour money into ensuring they have sturdy and reliable online systems.
Product innovation
2006 will see a focus on first-time buyers (FTBs) and the specialist lending market can expect to see a large number of lenders come up with innovative ways to help FTBs get on the property ladder, either in conjunction with government initiatives or just by identifying market niches.
Buy-to-let (BTL), self-cert and indeed non-conforming are becoming more mature. But there is still room for innovation and self-cert in particular should come to the fore as a product which can be developed to meet the needs of a growing number of potential borrowers who don’t have traditional income patterns.
When it comes to property investment, while it’s true that fewer new landlords are entering the market, there is still plenty of activity as existing landlords continue to grow their portfolios. Lenders with experience in BTL are developing a wider range of services to compliment their core products and encourage portfolio expansion.
Of course the u-turn on SIPPs has been highly annoying to those lenders and intermediaries who invested heavily in this area in good faith. Ultimately though, I don’t believe this will damage the overall market. Lenders will naturally have to keep a close eye on changes to the Housing Act and HMO licensing to ensure they can deal with any impact this may have on landlords’ attitudes.
BTL
10 years ago, when Mortgage Express first launched its BTL mortgage, investment in the private residential rental market was a high-risk option. The housing market was stagnant offering little prospect of capital gains. While rental levels offered relatively high returns there were considerable uncertainties about the effectiveness of assured shorthold tenancies in protecting landlords’ rights.
For investors who took the risk, the rewards have been considerable. Demand for renting has grown with the result that rental levels have risen. And as the housing market has adjusted to the 21st century’s low inflation-low interest rate environment, the rise in property prices has surpassed the expectations of even the most optimistic investor.
Investors today face a very different position. Far from being a high-risk investment, residential property now appears to be a much more certain opportunity than many of the alternatives. As legislators hoped, assured shorthold tenancies have created a much more active and ordered private rental market. As a result rental yields are modest but appear to be very secure. In the longer term we can still expect gains in value from a steady rise in property prices as real incomes grow. And, for the risk averse, property remains one of the best possible hedges against the return of high rates of inflation.
Lifetime mortgages
2005 was a significant year for the equity release market. Despite the fact many lenders saw slightly decreased business volumes on the previous year, there were several important developments which have contributed to an improved market for customers, intermediaries and lenders. We have also seen the bedding in of a safer ‘selling environment’, improved product choice and competitive pricing. This comes as a result of the first full year of FSA regulation and all the associated activities and monitoring to ensure lifetime mortgage sales are appropriate.
What can we expect to see in 2006? After the slight slowdown in 2005 the market should see a small increase in business volumes – up to say £1.3 billion – about a 15 per cent increase on 2005 figures. However, this growth will continue to be slow, steady, constant and controlled. There is nothing to indicate that the last two years’ new business trend will radically change despite the estimates of the vast fortunes of equity the over-60s could tap into. There are two key reasons for this slow growth. First, the impact FSA regulation has had on distribution, and second, potential customers’ misconceptions of equity release as highlighted in recent research conducted by Key Retirement Solutions (KRS). Both of these topics require significant attention from lenders, intermediaries and the trade associations.
2006 should see three or four new product providers enter the equity release market, although margins for late entrants to the market will be lower as they will have to be prepared for a slow growing market and highly competitive pricing.
Lifetime mortgage fixed rate pricing will remain very competitive and attractive for customers. There are some fantastic lifetime mortgage fixed rates on offer today and it would be great if money market rates fell to allow some offerings even closer to 5.5 per cent. Realistically, long-term money market rates in 2006 may not reach the same low prices. So we can expect fixed rate prices to slightly edge up – but then increased competition may keep many rates at under 6 per cent.
On the whole, 2006 should be a year of consolidation in light of the FSA’s rules and regulations. Product innovation will be more important than ever in an increasingly competitive arena. The lenders that will fare the best will be those who are committed to coming up with creative solutions to meet borrowers’ needs, as well as listening to the concerns of their business partners when it comes to service and criteria.
Lenders and intermediaries alike will have to be more keenly aware than ever before as to what customers are looking for when it comes to mortgage products and services and the way that they are sold, so it will also be essential to establish a spirit of collaboration and team effort in the industry to ensure it really is genuinely Treating Customers Fairly.
Tim Sturley is head of distribution at Mortgage Express
