Sinclair said AMI’s issue with Magellan is the concerns mainstream brokers have over LIBOR-linked lending given the degree of unpredictability of how LIBOR moves and Magellan’s margin over LIBOR which is currently 8%.
He said: “Clearly for those people who might be in that sub-prime arena we’ve still got a degree of regulatory concern from the Financial Conduct Authority around affordability.
“We would have to tread very carefully about how we view such rates and how we stress test them for affordability looking forwards.
“From an intermediary perspective we would have to be very sensitive about how we market that.”
Magellan Home Loans launched into the market in August this year with a product range aimed solely at borrowers with a previous history of heavy adverse credit.
A borrower will be considered for a mortgage regardless of the level of adverse credit they have accrued in the past, providing they have had a clean record for the past twelve months and they can provide a plausible explanation for the missed payments.
Sinclair agreed that there was a place for products like Magellan’s but it was neither a mainstream or a high volume sector.
Speaking at the Mortgage Business Expo in London Matt Gilmour, managing director of Magellan, said the product was only expensive if the borrower had a choice.
Sinclair said that while this may well be the case, it was still expensive.
“It is a high price to pay,” said Sinclair. “And I think this comes back to where the Mortgage Market Review started from, which is not everybody should own a property and there may well be alternatives which may suit them better.
“When you get to this type of price, renting does become more attractive.
“There will be borrowers who might want to do this but I think as we move to a world that is predominately advised I think it is hard for advisers to be in a position of recommending a product at this end of the market.
“Part of it is cost but there is also suitability and all the things that go with that.”
Gilmour said Sinclair’s comments were an “excellent” example of what he describes as “adverse creditism”, a phrase he coined at last week’s Expo.
He said: “What I mean by that is the attitude of ‘my mind’s made up don’t confuse me with the facts’.”
Gilmour said a customer with an adverse credit record who wants to buy a property worth £200,000 with a 75% loan to value mortgage at 8.52% with Magellan would pay £1223 per month, compared to a standard mortgage at 4% which would cost £800.00.
Over a two year period it would cost the borrower £10,000 more in mortgage payments than a mainstream mortgage product.
Gilmour said: “But before you say ‘ouch’ consider the alternative. According to the Office for National Statistics house prices are rising across the country by an average of 3.8% at the moment.
“Over the same two year period that means a £200,000 property will have increased in value to just over £215,000.
“So, is it good advice to recommend to a client that they rent for two years with a monthly rental of say £400 per month, £9,600 over two years, and during which time the home of their dreams has gone up in price by £15,000 or should they bite the bullet and take out a Magellan mortgage which gets them back on the property ladder today at a far lower overall cost?”
At the Mortgage Business Expo, Gilmour said he needed more support from intermediaries to bring his product to market.
But he would go direct to the consumer if he was not getting that support although he admitted this was a channel that he was not, at this stage, familiar with.
Sinclair said that while that was Magellan’s decision as a lender “building the advice model will be an interesting one for it”.
Gilmour said there was a “real danger” that brokers were increasingly turning their backs on parts of the financial market that they believed represented a risk to their business and it would appear that Sinclair was recommending they do so.
He said: “Doesn’t that undermine the real value of independent mortgage advice and isn’t that a retrograde step as far as consumers are concerned?”
Brian Pitt, chief executive of Rockstead the risk and due diligence service, was in support of LIBOR-linked mortgages which, he believes, are more transparent than traditional rate fixing by lenders.
He said: “It more closely follows the marketplace as interest rates rise and fall. I recall criticism in the past when rates moved up and lenders have been quick to respond but slow to respond when rates fall.
“Yes the margin on the Magellan product is high but that is for a number of reasons, I suspect pricing for risk may be the main one.”
The sub-prime market focused on pricing for risk during the 90s where LTVs were restricted and a menu of pricing options were available dependent on the customer profile, past credit history and affordability prospects.
He added: “Unfortunately as the market grew those principles were effectively binned in the chase for market share.
“I still feel those principles should apply and it looks like Magellan has started with that in mind.”
Gilmour said he agreed with Sinclair that every application should be assessed on its own merits and matched to the most suitable product but borrowers with an adverse credit history should be given a second chance.
He said: “When there are options available isn’t it the responsibility of brokers to assess whether the borrower deserves to be given that chance?”
