There has been a huge deal written about the plight of first-time buyers (FTBs) and the problems they are having in securing the requisite level of finance to buy their first property.
There is no doubt that this is a very serious concern for the market, but FTBs are not the only sector of the borrowing community who are finding it difficult to match their financial situation to what is on offer in the housing market.
While there is an ongoing focus on FTBs and how they can be helped, it is also important for lenders to broaden the scope of their innovation and create solutions for the wider community. Wherever lenders can help both new and existing homeowners move and keep the market fluid, they will be helping to guard against any sudden future downturns.
Innovation and criteria
Everyone accepts that house prices cannot continue to rise ad infinitum. However if there is not a certain amount of flexibility incorporated into the products in the market and they are not developed to meet the changing needs and circumstances of borrowers across the UK, then we will simply get to a critical mass of homeowners and new buyers who cannot afford to move or purchase property and the market will come to a juddering halt.
By innovating products on offer and improving the accuracy of the criteria in relation to the risk that individual borrowers represent and the credentials they bring to the table, lenders should be able to keep the market fluid while also keeping pressure on the brakes to help prevent it running away with itself.
One area where there has been some welcome innovation has been in providing for those sectors of the borrowing community which have an excellent credit history and are likely to see their earnings increase rapidly over the coming years.
For many of these individuals the problem of trying to buy a property is akin to a poor cash flow situation. They will have the money in the future, but cannot quite get their hands on it now and need someone to help them bridge the gap until they do.
To date there has been a real degree of rigidity in the mortgage market given its reliance on income multiples. While such a rudimentary calculation does work in some situations, it is not appropriate for all and certainly does not allow lenders to really take into account the various individual circumstances of their borrowing clients.
The move to affordability has helped borrowers take on loans, which are more closely aligned to their disposable income, and this has to be a more important consideration than simply reviewing a borrower’s gross income. However the problem remains that for some individuals, who have a well-structured remuneration path, there is little opportunity for them to take advantage of their future earnings at a time when they may need it most.
Challenge and solution
For lenders the challenge has been to try and create a financing vehicle that will not only enable the borrower to take advantage of their future financial situation, but also allow the lender to operate from a manageable and carefully assessed risk profile.
There is no point lending money if clients cannot pay it back, both in terms of economic and responsible lending considerations that must be taken into account.
The solution that lenders have come up with for this sector of the market is to combine a mortgage with an unsecured loan. For the mortgage, some require a deposit of 5 per cent and will then lend 25 per cent or 30 per cent of the property value on an unsecured basis. This means that in total individuals can borrow up to 125 per cent of the value of their property. This is not a license for people to overstretch their means and buy a property they cannot afford. Nor are such products designed to cater for all and sundry and certainly for BM Solutions, the decision has been taken that its offering will only be available through an independent broker, helping to ensure quality of advice.
Indeed in assessing this market and the product that BM Solutions is offering, it is likely that somewhere in the region of 50 per cent of applicants will be turned away. This is not so much because people of all circumstances will be seeking to take out such a mortgage, but because only those who match up to the very specific standards required will be offered finance.
It is important that both commentators and the wider public do not believe that such products are available to all. These products are not a way of circumventing problems that the average borrower has, but of providing solutions to those with particular circumstances.
This is true of many areas of the mortgage market and products like self-cert, self-build or offset are designed to meet the specific requirements of a particular group of borrowers. Simply because not everyone is suited to such a product should not in any way invalidate the mortgage or prevent it from being offered in the market.
So long as it serves a specific purpose and its distribution is carefully monitored and controlled, the UK mortgage market should be proud that it offers products such as combining secured and unsecured and indeed has deservedly won the reputation of being the most sophisticated mortgage market in the world because of its determination to innovate and its ability to meet the specific needs of so many of its borrowers.
However in any market, competition is also an important factor and while we should welcome innovation where it is appropriate, the market should also look to make itself as competitive as possible to ensure the end borrower receives both choice and value for money.
Using innovation effectively
At the moment the market for this type of combination borrowing stands at around £10 billion, with Northern Rock having established itself as the largest player in the sector. How long it holds on to that mantle remains to be seen, but the more competition that can be generated, the leaner and more diverse the products in this area will become.
There are a great number of financial products and tools available to lenders and the key is to use them as effectively as possible to serve each and every sector of their customer base. There are a large number of people in the UK who have a mortgage and who also have a personal loan to pay for their car. Others have a mortgage and may use a loan to finance their annual holiday. Why, therefore, is it so questionable to combine an unsecured loan with a mortgage solely for the purpose of house purchase?
The challenge for lenders is to segment and assess their clients effectively so they know which products will be suitable for which clients. By understanding their clients better, lenders will also be better placed to assess where individual needs lie and so be more able to cater for them.
By then providing products to these tightly underwritten niches, it is possible for lenders to not only serve the needs of their borrowers, but also to protect themselves from taking on poor risks. In combining a mortgage and an unsecured loan, it is important that there is no option to simply pay on an interest only basis. Elsewhere the type of mortgage loan being offered is also important and fixed and tracker products will help borrowers know exactly what they have tied themselves into and for how long, and manage their finances appropriately into the future.
For many the basic worry is that borrowers are simply being offered too much in light of what they are earning or the value of the property they are buying. However it is possible to guard against these fears by segmenting those being lent to and ensuring appropriate checks are in place to validate their circumstances.
Not for everyone
Linking mortgages with unsecured loans will never be a solution for the majority of the market, but unless we are prepared to develop the products available at the fringes and begin to make these areas as competitive as anywhere else in the market, then it will become increasingly difficult to cater effectively for borrowers across the board and ensure they have access to the best solution for their circumstances.
Innovation is not something we can afford to shy away from and it is not this that should be the worry for commentators and borrowers in the market. So long as the right products are going to the right borrowers then problems should be avoided. Making sure this happens is where the market watchdogs and commentators must focus their attention.
Chris Pearson is head of sales and marketing at BM Solutions
