Over the last few years, the mortgage market has undergone something of a mini-renaissance. Soaring house prices and staid income levels have prompted many lenders to re-evaluate product offerings in a bid to help more first-time buyers (FTBs) take their first step onto the property ladder.
Such innovations have included a slight shift away from conventional income multiples as a way of calculating the loan amount a borrower will take on, to one that places greater emphasis on affordability.
“The one thing that has been very helpful to first-time buyers is the introduction of affordability calculations,” says Ray Boulger, senior technical manager at John Charcol. “Affordability takes into account each individual’s circumstances and in some cases means the borrower can borrow more than if they gone down the multiple income route.”
Targeting FTBs
More recently, there has been increased focus on graduate and professional mortgages and even shared ownership schemes have come into the fray. In August, Scottish Widows Bank enhanced the income multipliers on its graduate mortgage product. Those who fit the criteria can get a five-year stepped fixed rate product.
Citing the difficulties facing FTBs, Gordon Bowden, business development director at Scottish Widows Bank, says the product was developed with those in mind. “This enhanced product offering is designed not only to help graduates purchase their first property at current market prices, but also to make repayments affordable by offering stepped interest rates in-line with expected salary increases.”
Moves into the shared homeownership market have also been made by Advantage Home Loans, which launched its Flexishare product in August. The product has been hailed as an innovative solution to helping FTBs, key workers and growing families onto the property ladder. It differs from other shared equity schemes as the borrower retains ownership of 100 per cent of the property rather than the lender owning a share.
Causing a stir
It seems lenders are all trying to find ways to help FTBs get a foot on the property ladder, but some developments have been better received than others. Nothing has caused as much of a stir as the recently announced ‘inter-generational’ mortgage concept unveiled by Kent Reliance Building Society. Its ‘deathbed mortgage’, as some critics are hailing it, has come under a barrage of criticism since its launch earlier this week.
The feature allows borrowers to extend the term of the mortgage indefinitely as a way of keeping payments to a minimum. On the borrower’s death, the debt and house are then passed to the children. Although the feature can be applied across the lenders’ entire mortgage portfolio, the idea that it can be passed down through generations implies it will be taken out mainly on an interest-only basis.
Although this type of mortgage is commonplace in some European countries and as far afield as Japan, Kent Reliance has broken the mould in the UK. But many are questioning whether the initiative is a step too far and can in fact be deemed as ‘irresponsible lending’.
Harry Katz, principal at Norwest Consultants, condemned the development. He said: “I think the move by Kent Reliance is irresponsible and the fact it is promoting it as a means of mitigating Inheritance Tax (IHT) is wrong. Interest only loans are not a good idea generally, as it is a pretty big leap of faith to assume the house can be sold later on and the mortgage debt repaid with the profits. Why try to reinvent the wheel? The only reason to do this is to make more money. This is a desperate attempt from a marginal lender to get greater market share.”
However, Kent Reliance’s deputy chief executive, Rob Proctor, has hit out at critics, and has emphatically stated that the innovation stems from customer feedback. He said: “The development of this concept is in response to borrower feedback, where customers wanted to know how they could keep the mortgage going longer. We deny any allegations of irresponsible lending; we have the lowest arrears in the country and nothing in this notion is promoting or encouraging greater debt.”
Industry response
Christopher Dean, spokesperson for the Council of Mortgage Lenders (CML), welcomed the move, but stressed the product comes with a heed of caution. He said: “It is clear that the mortgage market in the UK is extremely dynamic and the recent development by Kent Reliance will provide more choice for consumers. But as with all loans, we would advise all borrowers to seek financial advice and what is very important, especially with this product, is that the children likely to inherit the debt have discussed the situation with their parents and are exactly aware of what may happen when they die.”
Looking ahead, attempts by lenders to be more innovative are likely to continue as more new players enter the sector as the battle for market share becomes intensely fierce. In particular, the sector is likely to see focus on affordability in a bid to entice more borrowers.
Boulger says: “In terms of product development going forward, I think we are likely to see more lenders move into the shared ownership market, and place greater emphasis on FTBs, as it is this area of the market that offers the greatest opportunity for growth. This will be good as it will promote more choice and stimulate more competition in the market.”
