Specialist lending refers to loans given to borrowers whose specific financial circumstances mean they fall outside of the somewhat unyielding limits of high street lenders’ criteria.
It was out of the need for more sophisticated underwriting and risk assessment techniques that specialist lending emerged. As the UK social demographic has evolved, successful lenders have emerged as those able to adapt to changing demands, offering products that have the capacity to meet niche requirements, and respond to the unique needs, restrictions and limitations of new consumer-types.
Niche lenders have traditionally dominated the specialist sector, but as mainstream product-providers are increasingly entering the market, it is becoming accessible to a wider borrower population. As lending patterns have changed – fostering greater accessibility – just how ‘specialist’ specialist lending really is, may be questioned. What was once considered within the realms of specialist lending has gradually become a more mainstream response to a more common borrower demand.
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Increased competition has prompted lenders to offer much more sophisticated products, and borrowers are far less constrained in their choices and options. These developments have had a significant impact on the non-conforming sector. An estimated nine million people are currently unable to get a mortgage on the high street and are instead turning to the specialist market.
However, it is a common misconception that the market consists simply of those with adverse credit histories, Individual Voluntary Arrangements and CCJs. While these are covered within the remit of the market, the growth of the specialist sector is also due in a large part to the rise in demand for self-certification mortgages, needed by those who are self-employed or who may otherwise experience income fluctuations.
In addition, the buy-to-let boom should be taken into account, which has compounded sector growth as people have sought specialist mortgage products in unprecedented numbers.
Added to this, the market in unusual properties must be considered, and these sub-sectors of specialist lending also apply to those with clean credit histories. A large number of key providers will now consider lending on unusual properties. Financing an unusual home is becoming easier as mortgage solutions for those looking to purchase converted barns, mills, lighthouses, waterside properties, high rise flats and mixed commercial and residential blocks are increasingly considered by lenders.
Hesitant
Understandably, lenders have traditionally been hesitant to provide loans on such properties, due to the higher levels of risk. From the lender perspective, issues such as whether the construction is sound, the re-saleability of a property and potential insurance costs must be taken into account and increase the commercial risk involved.
Underwriters would also look at future saleability, which is a key factor in evaluating whether a property presents an ‘impossible case’ or an acceptable level of risk. Many non-standard properties often require considerable amounts of work to make them suitable for residence, and this may require high building costs to adapt them to meet planning legislation. On top of this, such properties may necessitate a continuous level of care in the future, requiring borrowers to be able to afford setting aside money on a regular basis for maintenance costs. Insurance quotes tend to be significantly greater for such properties, another key consideration which must be taken into account.
Extreme measures
As the market becomes increasingly saturated, borrowers are resorting to ever more extreme measures to be able to get onto the property ladder. For some, this has meant converting existing, sometimes peculiar properties into homes. The self-build option has increased in popularity recently, and many property owners are using this opportunity to convert properties, especially with the incentives offered for energy efficient changes.
With the trend for ‘going green’ continuing, there has been a renewed interest in eco-friendly properties and mortgages that encourage home improvements with an ecological emphasis. Industry debate has questioned whether there needs to be environmentally friendly financial incentive packages for borrowers and lenders.
Proponents suggest that these would encourage the growth of the ‘ethical’ green mortgage, though those opposed to the idea assert that ‘green’ packages are simply an excuse to charge borrowers higher prices. Increasingly, lenders are considering loans for previously problematic properties such as timber chalets, thatched cottages, derelict houses, log cabins and other properties that are constructed from ‘traditional’ materials.
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Most mortgage lenders will consider a loan subject to a thorough property valuation, which assesses the building’s state of repair and the construction type before money is released. Though fit-for-purpose technology certainly has its place in the lending arena, specialist lending needs specialist attention.
Truly specialist lenders, with years of experience are amply equipped to assess the more extraordinary cases. Such lenders are most often intermediary facing, because the types of mortgage products that they deal with usually require the help and advice of a broker who can help source a suitable mortgage. Nowadays, brokers and packagers are less fazed by unusual properties as the underwriting expertise of those in the specialist market affords them greater lending flexibility. Experienced lenders are willing to consider a variety of properties, subject to an acceptable valuation report which would verify that the property fits their lending criteria.
For those who fancy swapping their current home for a houseboat on the Thames, a semi-converted lighthouse in Cornwall, or an old mill in Kent, specialist lenders may be able to provide a mortgage solution. However, ‘weird and wonderful’ properties are not the only ones that come under the ‘unusual’ label.
When the criteria are examined closely, it is surprising what other properties are ruled out by high street lenders as not only the property type, but also the construction type can create obstacles for borrowers. Non-standard forms of construction may present a problem for those looking to take advantage of ‘right-to-buy schemes’ on council housing, for example.
Looking at cases
A young married couple – him a self-employed builder and his wife, a housewife – were looking to get their foot onto the property ladder as first-time buyers. Having lived in their three-bed, semi-detached council property for the last five years they were offered the opportunity to purchase it from the council at a reduced price. Despite having clean credit histories however, they had great difficulty securing a mortgage with high street lenders, due to fact that the property was a Laing Easiform construction type. Some specialist lenders would consider lending in such a situation and, subject to an acceptable valuation report, would be able to offer a product.
It is not only the type of property and construction that can create challenges – the age of a property can also mean that a case will be branded as ‘unusual.’ Mr and Mrs Roland were looking to move to a more environmentally friendly property, and found a converted old mill in Bournemouth that they planned to convert.
Due to the age of the property, and its state of repair, their prospective home does not meet the construction requirements of many lenders. Again, a specialist lender would be able to assist here, provided that the property was subject to a valuer’s report. A specialist survey, such as a structural engineer’s report, may also be required to ensure that the property does not demand an unrealistic level of care and maintenance. The re-saleability of the property in the future would also be examined.
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Flexibility
Flexibility is crucial in this market, and in reacting to the dynamic growth in the specialist market, lenders will have to be increasingly innovative in their product design, the scope of the range, and their lending criteria. Experienced lenders have extensive knowledge of underwriting techniques and can offer a sensible approach to risk within a tailored product structure which is borne out in their consideration of unusual properties. Borrowers’ loan requirements have now expanded to cover a broader range of needs.
Lenders that remain knowledgeable, committed, and retain the flexibility to adapt to this demand are most likely to achieve a larger chunk of the market while gaining the trust and business of intermediaries. New consumer types produce new niche markets, and financial providers able to embrace these and provide products which meet novel needs are the ones most likely to succeed. The sub-sector of the specialist market which comprises unusual properties may be one such niche.
