When it comes to the pecking order in the mortgage market, mainstream mortgages have always come out on top of the pile. However as house prices continue to blossom, the large loan market is coming in to its own and playing an increasingly important role for providers.
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It is difficult to quantify the large loan – or high net worth sector as some call it – given that different lenders draw the line at different points in the sand. For some lenders, loans over £500 000 fall into this category while for others a clear distinction may not be drawn until the mortgage in question hits £1 million or possibly even more.
The one thing that is for sure, however, is that the number of people looking for lending at this level is growing and this sector has doubled over the last two and a half years.
Creating an identity
As the large loan market continues to grow, it will increasingly define itself and take on its own characteristics. It has already created an identity of its own, but there are huge opportunities ahead and we are likely to see a lot of change in this particular area in the near future.
At the moment the mainstream and large loan markets could be likened to siblings and there really are only a couple of significant differences. In the first instance, loan-to-values (LTV) for the high net worth market tend to be smaller.
Typically those borrowing more substantial amounts are doing so on the back of a previous property sale, have a good deal of personal wealth behind them, or in many cases both. This means that although they are buying the more expensive properties, they are looking to borrow only 50 per cent to 70 per cent of their value. For mainstream mortgages, LTVs are higher and are generally concentrated between the 75 per cent and 95 per cent mark.
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The other slight difference at the moment is on the rate charged for these bigger mortgages. Most lenders have kept their rates as competitive as possible and in doing so there is perhaps only 10 or 20 basis points between what they offer on products at the top end of their lending spectrum to those lower down the scale.
This is all very well when the market for large loans is relatively small, but as it begins to gather speed and demand shoots up, then lenders will increasingly be looking for a bigger return on the significant amounts of capital they are tying up in these mortgages.
Drifting apart
Over the near future we are likely to see our mainstream and large loan siblings drift apart and become more like cousins. The pricing differential is likely to grow between the two product ranges and as an increasing number of borrowers need this level of finance, lenders will begin to tailor more services specifically to their needs.
The good news for borrowers is that rates will not be allowed to drift too far, given the competition that exists in this market. Borrowers tend to be financially astute and because of the sums involved there is a significant difference between the initial pay rate and the standard variable rate when the deal comes to an end.
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In practice this means borrowers are always looking for the best deal and lenders have to remain competitive if they want the business to remain on their books. In a bid to keep borrowers for longer, there are more three and five-year products developed for large loans and it is likely this trend will continue.
Tracker products also offer an excellent way of keeping customers in the long-term, but striking the right deal can be difficult when competing with some of the discounted rates available.
One interesting point to note is that there is also a significant level of self-certification from clients looking to arrange large mortgages, as in many circumstances their own financial arrangements are more complex than the average mainstream borrower. Whether they have a number of business interests or have investments that generate a significant amount of income each year, it is often easier for them to arrange self-cert mortgage finance.
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Individuals who have significant wealth are not only looking for residential properties, but also buy-to-let investments. Although this sector is not as big as that for residential large loans, it is certainly worth keeping an eye on. Momentum is building and much of the impetus is coming from clients in the South East where City bonuses have made quite an impact on a number of other areas in the housing market.
Dedicated processing
As with the mortgage world generally, having keenly priced products now has to be taken as a given if lenders want to win large loan business and service has become the next level of differentiation.
Some lenders already have dedicated teams in place to deal with their high net worth range. Customers taking on borrowing at this level want speed and simplicity. Once the decision is made to buy a property, they want things to progress with the minimum amount of fuss and for things to fall into place quickly.
This is one of the biggest challenges for lenders and the assembled teams are there to manage the process and perhaps take a more considered and kid glove approach than in other areas of lending.
In general, the application process is a fast-track one and this is made possible by the added security lenders have from the generally larger deposits in this sector. However, underwriting also has to be efficient and simply because someone is able to put down a £1 million deposit on a house valued at £2 million does not mean they are a suitable applicant. With properties of this type, it is also important to ensure the borrower is able not only to service the mortgage, but that they also have the financial wherewithal to maintain the property to a certain standard into the future. After all, it is the security for the loan in the first place.
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Many larger loans are arranged through intermediaries and service is not just an issue for borrowers, but for the advisers as well. Large loan clients are among the most important of an intermediary’s customers and letting them down is not an option. Intermediaries therefore need to trust the lender in question, be sure of the service that is offered and have confidence that if the loan criteria are met, the application will proceed without problems.
This is partly the reason that for very large mortgages, for example, those over £2 million, private banks have established a niche and tend to be the lender of choice. Over and above the fact that not many high street banks will be able to deal with such loans on an everyday basis, clients trust the service and discretion offered.
The importance of brand
It is perhaps at the large loan end, more than anywhere else in the mortgage market that brand is important. The larger the loan, the more clients want to know that their lender will be able to give them the service they need. They want to know things will be handled in a certain manner and be sure that if problems come up they will be dealt with efficiently.
This is why it is difficult for new lenders to break into the large loan market and the main competitors for loans between £500 000 and £2 million tend to be the larger high street brands, while those over and above that are dealt with by the private banks.
Increasingly the larger high street banks will look to compete with the private banks, and given their established pedigree they are in an excellent position to do so. However for new lenders looking at this arena, things will be very difficult unless they come to the table with excellent parentage. Without the right credentials it will be very difficult for them to make any sort of a breakthrough.
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Not only will customers be wary, but intermediaries will also fear putting their most important clients into the hands of a lender without an established track record.
For those already in the market, the next few years will be crucial as they seek to establish themselves as lenders of choice for the new business pouring into this market.
Even if house prices cool, there seems little evidence to suggest they will fall back and certainly in the medium to long-term there is only one way in which they are headed.
The large loan market may never rival its mainstream cousin for volume, but who knows how long it will take before it begins to catch up to it in value?
