Overall, 2007 was a very strong year for the mortgage market. For all the anxiety that emerged from August onwards and the slowdown affecting many lenders as the year drew to a close, we still achieved the highest level of gross mortgage lending ever.
Total lending was estimated by the Intermediary Mortgage Lenders Association (IMLA) and the Council of Mortgage Lenders to be around £360 billion; 5 per cent up on the previous year.
Specialist sectors, both in terms of products and providers, have played a key role in this expansion as they have increasingly done for the past 10 years.
Buy-to-let (BTL), the largest of the specialist sectors, has become a mature market and now accounts for a similar proportion of new mortgages, as it does households, in the UK – around 11 per cent.
As for 2008, prospects for BTL are good. In a quieter housing market characterised by lower transactions and stagnant to falling house prices, rental demand is expected to surge upwards, as families who in other circumstances would have purchased choose to rent instead.
The influx of migrants, who typically live in the private rented sector, continues unabated. These factors will support the credit quality of BTL and incentivise landlords.
Disproportionately affected
Non-conforming has enjoyed buoyant growth, assisting many UK families to purchase a home. It also helps them to restructure their finances and avoid more serious problems.
Nevertheless the sector has been disproportionately affected by the fallout from the US non-conforming crisis, and volumes started to ease in the final quarter of 2007.
However, arrears and possessions on existing UK non-conforming lending are not expected to rise as much as they have in the US. Unemployment here remains low, there are few forced sales and most borrowers will be able to meet their loan payments.
New business originations are likely to remain relatively subdued during the current year, with many traditional providers focusing more on other specialist sectors that may offer greater potential in 2008.
Success stories?
Self-certified mortgages have been one of the success stories of the UK mortgage scene of recent years, offering a flexible and valuable solution for borrowers on irregular incomes – in the majority of cases ‘prime’ customers who are unable to prove income.
However, they continue to attract regulatory attention giving rise to concerns among some intermediaries that it is difficult to write any true self-cert business without running into conflict with the regulator.
Based on IMLA estimates, self-cert was stable in 2007 as compared with 2005, but with the strong expansion of the market, self-cert’s share of the overall market shrank slightly.
It remains, however, an important option for many home owners and the industry needs to reach a mutually acceptable routine for underwriting self-cert business.
Equity release continues to under-perform relative to expectations, especially given the increasing demographic of an ageing, asset rich and cash poor population. The products and providers are there, but consumer take-up remains low.
100 per cent or more lending has always been a first-time buyer product. Declining affordability and changing social demographics have reduced demand for very high loan-to-value lending. This is just as well because the credit crunch will make such loans more expensive and harder to get.
Too early to tell
Aside from the specialist sectors, volumes of prime home loans – both through intermediaries and direct – reached a record level of around £255 billion in 2007, around £50 billion higher than in 2005 and bigger than the whole market in 2002. In this sector, 2008 is unlikely to be another record year.
A lower level of property transactions, a cooler housing market and the ongoing repercussions of the credit crunch will all mean that lending volumes will be more subdued.
There will still be prime customers purchasing properties for owner occupation, in many cases regarding the cooler market as an opportunity to get a good deal. There will also be a flow of mortgage holders refinancing existing loans.
For both lenders and brokers, this year remains one of opportunity – although in many cases they will need to refocus their attention to the segments that offer the greatest potential relative to their expertise. Both borrowers and lenders will be more cautious and sales will probably take longer.
With some players in the market less visible than they were in the past, there will still be plenty of business to be done by lenders and brokers that cut their cloth accordingly.
