The modern specialist lending sector is big business. In 2005 it advanced £36.1 billion worth of loans in what was its most successful year to date, according to analyst Datamonitor. And while figures are not in for 2006, the influx of new lenders are testament to the continuing growth of the market and we can expect this year to be another record-breaker. There are currently 9.1 million households in the UK that are classed as ‘non-standard’ (including adverse credit and self-cert but not buy-to-let) and Datamonitor predicts that by 2010 this will have grown to 9.42 million people, accounting for more than a quarter of the country’s adult population.
A real success story
It is clear that specialist lending has undergone quite a transformation in recent years, considering that just over a decade ago it was a small niche sector on the edge of mortgage industry, often referred to as sub-prime and handled by only a few brokers. In fact the specialist sector has become the success story of the mortgage industry.
In 2003/2004 non-standard lending grew by 9.3 per cent compared with 3.4 per cent growth in the mainstream sector. By 2004/2005 specialist growth had slowed to 1.8 per cent, but the mainstream sector actually recorded a 5.3 per cent drop in mortgage business. Of course 2004/05 was a tough period, but it was largely the specialist sector that kept the market in positive growth figures.
This not only proves that the demand for non-standard mortgage products is on the up, it also shows that the traditional balance between mainstream customers and specialist borrowers is shifting. In short, a growing number of people need home loans that have been designed to meet their specific personal circumstances and financial needs.
That is also the foundation on which the modern specialist lending sector was built, giving borrowers the mortgages they needed without penalising them for their situation in life, whether it was due to finances, employment status of life events.
Turn the clock back 10 years or so and it was a completely different picture and a marketplace where mortgages were often seen as a privilege rather than an important financial product. After the boom and bust of the 1980s, many would-be borrowers were lumbered with poor credit ratings and CCJs that made it virtually impossible for them to get a mortgage from the major banks and building societies on the high-street.
At the same time many of the mainstream mortgage lenders had been blamed for stoking the mortgage bonanza of the 80s and the subsequent fallout of an overheated property market that resulted in people losing their homes. Their response was to become ultra-cautious with their lending criteria so that not only did they reject customers with less than lily-white credit histories, they also turned away any borrower that deviated form the norm.
For those borrowers turned away from the high-street, the only option was usually to seek out a back-street broker offering hugely expensive mortgages with lots of fees and tie-ins. So the entry of specialist lenders was a welcome addition to the mortgage market.
Enter the specialist pioneers
The approach of the new specialist pioneers then was virtually the same as it is now. Good products, competitive interest rates, no long tie-ins or hidden charges, and of course excellent service. Some of us with longer memories can cast our minds back to the late 1990s and recall just how new and different specialist lending seemed then, and more specifically the challenge these companies faced trying to establish themselves.
The mortgage industry was still unregulated; it was dominated by the big building societies and even bigger banks; a lot of brokers had moved into the market from the recently legislated IFA sectors; endowment mis-selling was big news and the property crash of the 80s was still fresh in people’s minds – so overall consumer perception of the industry was poor.
The new entrants really had to work hard to establish themselves, build relationships with brokers and show to borrowers and the market at large that they had something new and good to offer a huge number of people in the UK that had problems trying to get a mortgage.
The rest, as they say, is history. The specialist sector has gone from strength to strength, primarily by follow the same basic principles of putting the customer first and providing the products they need and the service they deserve. The original core of non-standard customers has grown from people with poor credits ratings, CCJs and previous payment issues to encompass borrowers, because of their circumstances, are rejected by the prime lenders.
For example the self-employed, who now number 3.6 million people in the UK and almost 13 per cent of the country’s total workforce, yet many are still often turned away by mainstream lenders if they do not have three years’ business accounts, or need a flexible mortgage that can accommodate the fluctuating cash flow that many businesses have to deal with.
Then of course there is the fast expanding number of contract workers, freelance and temporary employees, or people who hold down a number of different jobs, all of whom may have solid payment records but because their employment patterns are slightly different they struggle to be accommodated by prime mortgage lenders.
Personal circumstances may also place a borrower in the non-standard box, and again it is the specialist lender that comes to the rescue of the recent divorcee who has never had a mortgage in their name before, or the estimated two million people that do not have bank accounts.
Specialist lenders have also been supportive of the flourishing buy-to-let market and the vitally important right-to-buy sector, which has helped more people own their own home. And while some critics continue to wring their hands over self-cert products, specialist lenders have developed this market in a customer-centric manner and ensured its future as an important mortgage solution.
How far have we come?
To show just how far specialist lenders have become, particularly compared to the inertia of their competitors in the mainstream market, one of the biggest growing areas of non-standard lending has been in near-prime; borrowers who fail to meet the inflexible lending criteria of prime lenders, but with the help of underwriting by specialist providers can still find themselves a competitive home loan.
Specialist lenders have also navigated some of the bumps along the way as well, such as regulation, which many thought would be so rigid that it would spell the end of non-standard borrowing. Once again the sector rose to the challenge and embraced legislation, working with the Financial Services Authority and other bodies to ensure that regulation was workable and brought real benefits to consumers.
The same is true of the packager industry that effectively grew up to serve the specialist lending sector. Critics said that regulation would be the death knell for packagers, yet some specialist lenders realised the important role they could play in supporting brokers, so good in fact packagers have benefited and thrived alongside the continued success of non-standard lending.
If you need convincing of how big a business the specialist sector is, you only have to look back at the activity among lenders, what with the entry of Halifax into the market in 2001 with its successful BM Solutions brand, along with other prime lenders moving into the specialist sector; the purchase of Mortgages plc, Preferred and Advantage by big merchant banks; or the high-profile launch of edeus and Rooftop among many others. Everyone wants a slice of the specialist pie.
This means there is more choice than ever before for the consumer, with competition forcing lenders to be keen on price. Increased competition also means lenders must stand out from the crowd, so this has resulted in more innovation in terms of technology, such as decisions-in-principle and automated valuation models; products like flexible mortgages and near-prime loans; and service in the form of enhanced online processing and the continued importance of personal relationships.
Things continue to look good for the future of specialist lending. However, there will be challenges ahead that will help separate the long-term pioneers from those in it for short-term profit.
Bankruptcies are increasing, which will test the risk appetites of many new lenders; competition will squeeze margin, so efficiency is paramount; and as volumes increase customer service will be tested, leaving any weaknesses clearly exposed.
I predict another 10 years of success for the specialist lending market. In fact, as society changes, with different attitudes to self-employment, consumer debt and the increase of student loans, the size of the specialist market will grow to an extent that it could represent over 50 per cent of the overall market within the next 10 years – making it the new mainstream, while traditional prime lending is more of a niche market. mi
Ian Giles, Director of Marketing at Kensington Mortgages
