The buoyant property market has contributed to a four-fold increase in mortgage borrowing over the last decade, but non-conforming lending has grown even more rapidly during the same period. It has been estimated that non-conforming lending will be worth around £25 billion this year, compared to just £1 billion 10 years ago – meaning it has grown around six times faster than the burgeoning mainstream market over the same period.
Erosion of margins
However, despite rapid rises in mortgage borrowing, margins on all types of mortgage lending – including the non-conforming sector – have fallen in the last decade. Erosion of margins has been most marked in the near-prime sector. The fall in margins in the non-conforming sector has been less pronounced, but has accelerated in the last five years.
David Tweedy, managing director of Platform, summarises how non-conforming lending had evolved over the last decade. 10 years ago, lenders operating in this sector ran highly centralised businesses. All applications were underwritten individually and the widespread use of computer technology for lending decisions had not yet evolved.
By 2000, the number of lenders operating in what was still an unregulated market had grown to around a dozen. At that stage, manual underwriting methods continued to prevail. But since then, growth has continued apace and global investment banks are targeting non-conforming lending. There are now at least 30 lenders in the market, of varying types and size. The use of technology is much more widespread and lenders are increasingly making automated lending decisions. There is also some consolidation within the sector, and lenders are exploring new methods of distribution.
Choices for borrowers have also widened over time. A decade ago, options were limited but borrowers can now choose from a full range of fixed, discounted and tracker loans. Early redemption charges are also less common than in the sector’s early days, and as credit assessment techniques have improved many lenders are now prepared to consider higher maximum loan-to-value (LTV) ratios than they were 10 years ago. The market has adapted from the strict and set non-conforming to now offer options ranging from the near-prime, all the way to heavy adverse. Lenders are also now offering a service for people made bankrupt, giving them an avenue to step back onto the property ladder that has further aided the growth of the non-conforming market.
Driven by demand
The growth of the non-conforming market and the number of lenders and lending opportunities has been driven by demand from consumers. Over the last decade, levels of personal debt have grown significantly, and there has been a rise in the number of county court judgements (CCJs) and instances of late payment of all kinds of loans. There has also been growth both in personal bankruptcy cases and self-employment.
All of this means that there has been rapid growth in the number of borrowers for whom a ‘conventional’ mortgage may not be an option, and the market will continue to grow for the foreseeable future. With different options available within the non-conforming market, from the very near-prime, all the way to heavy adverse, more people are able to get onto the property ladder, despite their past financial difficulties or current circumstances.
An expanding market presents new opportunities, both for existing players and those moving into the sector. Market share can be boosted by providing more attractive pricing, procuration fees and service standards.
Branding can be used to attract customers, and technology can drive down costs and improve efficiency. And new niche markets are opening up, including lending on different types of property, second charges and loans for expatriates and immigrants.
Non-conforming lending is continuing to grow. Borrowers have a wider choice of products and providers than ever before, and increased competition is delivering benefits to consumers. The growing market means there is room for new entrants – but increasing competition means that returns for lenders are lower than they were five years ago.
With a host of new lenders set to enter the market over the coming 12 months, the market in general, and specifically the non-conforming sector can look forward to further growth. Increased competition will enable consumers to get the best deal, with non-conforming product rates edging closer and closer to prime borrowing.
