Rejected mortgage applications hit the headlines last week, with statistics suggesting that the number of declined applications has increased by 60 per cent in the past six months.
According to price comparison website MoneyExpert.com, more than 738,000 applicants were turned down by mortgage lenders in the past six months as banks and building societies enforced stricter lending conditions.
The website’s research says that in the six months to March, around 463,000 people had a mortgage application rejected. This figure rose to 738,000 in the six months to October as Bank of England interest rate rises hit home and borrowers come up against tougher lending criteria.
Sean Gardner, chief executive of MoneyExpert.com, says: “Life is tough at the moment if you’re applying for a mortgage. The financial environment is far more stringent than in the Summer of last year and people need to be prepared for rejection.
This time last year house prices were 10 per cent cheaper – and the year before that they were 20 per cent cheaper – so it’s no surprise that the Council of Mortgage Lenders (CML) has suggested the number of first-time buyers on the market is dwindling.”
MoneyExpert says that young people are faring worse – around one in four applicants in the 25 to 34 age group were turned down for a home loan in the six months to the beginning of October.
“But with so many applications being rejected it’s unlikely that only first-time buyers are being affected,” says Gardner. “Anyone looking to remortgage should apply with caution and take professional advice if they’re unsure – too many failed applications could affect your credit rating.”
A tougher market
There is little doubt that the five Bank of England Base Rate rises since August 2006 have had some effect on the property market, adding around £1,320 to the annual cost of a typical £150,000 variable rate mortgage. Combined with the effects of the credit crunch and Northern Rock saga, it is certainly a tougher market in which to get a home loan.
Figures from the Buildings Societies Association (BSA) show that members are reining in their mortgage approvals. Building society gross advances amounted to £4,230million in September 2007, compared to £5,047million in September last year. Net advances were also down – from £1,906million in September last year to £825million in September 2007.
Approvals were £4,319million in September 2007, down from £4,874million in September 2006. BSA director-general, Adrian Coles, says that September was subdued as societies ensured they only lent money to people that could afford to borrow.
Meanwhile other figures, from price comparison website Moneysupermarket.com, suggest that many first-time buyers are simply no longer trying to get on the property ladder.
Following a YouGov poll, the site says that since March this year, the percentage of people classed as a ‘first-time buyer’ has dropped by 20 per cent, suggesting that climbing house prices, rising interest rates and the dwindling pool of properties available to first-time buyers are decimating the first-time buyer market. Those consumers that are buying or remortgaging are turning to fixed rate deals of between one and five years in order to provide peace of mind for their monthly mortgage payments.
Louise Cuming, head of mortgages at moneysupermarket.com, said the research suggests that first-time buyers are a dying breed. “Where are they going?” she asks.
“The rate of decline is surprising and the five interest rate rises in the last 14 months means it is now more expensive for the first-time buyers to get onto the housing ladder. First-time buyers are the lifeblood of the housing market and provide essential liquidity, so the fact this segment is getting smaller is worrying for the economy as a whole.”
GMAC-RFC director of marketing, Jeff Knight, says figures can be startling. But he suggests what we really need to understand is why such applications are being turned down. “Asking the ‘why’ question to qualitative research always throws light on things which statistics do not,” he says.
“But one thing is clear, for the broker market, these figures clearly demonstrate the need for technology. Technology gives the necessary benefits to help in the modern market, which manual underwriting does not. I think we will see the continued natural migration of brokers preferring technologically led lenders because they can give certainty, consistency and confidence over decisions.”
Questionable statistics
However, although the BSA figures showing that approvals and advances are down on this time last year are recognised as a reliable source, some industry pundits have raised concerns about MoneyExpert.com’s figures and have questioned what they really mean. The site’s estimates are derived from a sample poll of 1,000 respondents and so generalise the whole market – meaning that in reality, the number of rejected applications is probably far lower.
“I think it is important to note that these are based on the results of a survey and have then been extrapolated to give a market-wide figure, as opposed to being based on actual stats from an official source,” says London & Country head of communications, David Hollingworth. “Our experience does not point to any notable tightening of criteria in the prime market nor any lift in the number of declined applications.”
A quick ring-round of lenders finds that the general consensus is that they are not declining any more applications than usual. Brokers, on the other hand, say the figures prove the need for independent advice so that customers do not apply for products they do not qualify for.
Katie Tucker, technical manager at John Charcol, agrees that the figures are likely to be unreliable. She says: “We were initially very surprised at these figures: theoretically no mortgage applicants should be turned down by lenders except for the ones that are found to have withheld negative information, or the few whose score surprises them by being very low, due to lack of credit.
“A 60 per cent figure implies that borrowers are going direct to lenders, or not taking advice, and they are consenting to a credit score without knowing upfront that they meet the lender’s criteria. Not only do too many credit searches affect your score, significant time is wasted while the home buying public search and apply only to be turned down. This goes to show just why it is vital that borrowers use a broker who can select the right mortgage deal for them, taking into account all lender criteria, before they apply.”
Tucker also points out that a different polling company was used than when previous results were compiled and says people were merely asked whether they had had an application rejected, making comparison of the current survey with past results difficult.
Tucker’s view is backed up by Melanie Bien, associate director at Savills Private Finance. She says there is no real evidence that the number of rejections is on the up and that decent mortgage brokers should know where to place business to ensure this does not happen.
Fewer products, less choice
“Certainly, the market is getting tougher – there are fewer products available and less choice,” says Bien. “So it will be increasingly difficult going forward for those who don't want a standard mortgage, have a clean credit history or a sizeable deposit. Lenders have been re-pricing some products upwards – notably trackers – but fixes have fallen a bit.”
According to Moneyfacts, lenders have withdrawn 40 per cent of their mortgage deals in the past three months, making it a tough environment for anyone looking for a mortgage deal.
Most of that has been due to the collapse of the market for non-conforming mortgages, with 54 per cent of those policies being taken off the shelves. But the number of mainstream mortgage deals has also dropped by 16 per cent. Much of this can be attributed to lenders becoming more cautious due to the increased risks in mortgage lending.
Julia Harris, mortgage expert at Moneyfacts.co.uk, says: “Overall, taking account of both prime and non-conforming deals, the total number of buy-to-let and residential products available has fallen a staggering 40 per cent in just the last three months. While most of this change can be attributed to the non-conforming market, seeing a 72 per cent reduction in the buy-to-let market and a 54 per cent cut in residential deals, the 16 per cent fall in prime residential products is worth noting.”
While a 16 per cent drop may not sound much in comparison to the non-conforming market, within a historically static market this is certainly unusual and the reasoning much less clear cut. Northern Rock slashing its 230 plus product range to just 70 products has certainly played a role, as has the merger of Nationwide and Portman Building Societies.
The rest of the withdrawn products can only be attributed to many lenders making more minor changes to their ranges. Some are withdrawing their higher risk products, for example, those over 100 per cent loan-to-value (LTV) or their more specialist deals, such as self-cert. Others are simply streamlining their ranges.
Clearly an overall 40 per cent reduction in products available will mean less choice for borrowers, particularly for those with bad credit, irregular incomes or those looking for high LTV products. This, in turn, could lead to an increased number of rejected applications.
“Lenders are facing a tough time in coming months and we can’t see this changing anytime soon,” says Bien. “Borrowers are likely to need more assistance in getting the right mortgage finance for their circumstances, most probably by using a broker. This is a fantastic opportunity for brokers and one that we are keen to embrace.”
But however keen brokers might be, it is worrying that lenders seem to be allowing the market to stagnate; very few new launches are being made, rate changes are slow and there is a discernable lack of innovation.
“Lenders are taking a cautious approach, taking preventative action based on what they have learnt from the US,” says Harris. “Only time will tell the true extent of the UK mortgage troubles. If housing prices continue to fall or arrears begin to rise, these could be a catalyst for trouble far worse.”
Future
Going forward, the non-conforming market may see an increased amount of declined applications as the credit crunch forces lenders to withdraw from the heavier end and reduce LTVs available – this could impact on those that would have previously expected to secure a mortgage but will find a much more limited choice, or in extreme cases a lack of available products.
Lenders, that only a few months ago were actively promoting high LTV loans and low rates of interest, have since raised rates and tightened criteria. This change is off the back of a full-scale re-pricing of risk across the board as the waves from US non-conforming defaults continue to swamp global credit markets.
“Pricing in the specialist market has increased as a result of the troubled capital markets and it is uncertain as to how long it will be before the situation eases,” says Hollingworth. “However it would look highly unlikely that the pricing in the non-conforming market will return to the cut throat rates that we’d seen before the crunch hit. Prime re-pricing has been minimal and the market remains very competitive although next year promises to be a tougher year for everyone.”
Undoubtedly the Northern Rock situation has further exacerbated the outlook and consumer confidence. Experts say the situation will ease over the coming months as confidence returns but there has been a fundamental change in the market and it is unlikely we will see a return to the products or criteria of the last few years for some considerable time.
Instead we are likely to see new trends within the mainstream mortgage market. As investors demand ever higher rates and lenders seek to maintain the competitiveness and affordability of their products, there will be an inevitable squeeze on margins and, consequently, intermediary procuration fees.
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