The niche mortgage market is set to become the biggest battleground among lenders over the next few years. And with house prices slowing and first-time buyers thin on the ground, advisers predict that lenders will – more than ever before – be using product innovation to drive business.
James Cotton, mortgage specialist at London & Country, says historically low rates are now being offered across all so-called specialist ranges. He points to a steady fall in the rates offered on buy-to-let, sub-prime and self-certification mortgages over the last year, despite the Bank of England Base Rate remaining at 4.5 per cent since August 2005. Although these markets are not driven directly by the Base Rate, Cotton argues the slash in rates is a sign of the increased importance of these offerings.
Cotton says: “One thing that all niche mortgages have in common in the last year is that they have all become more competitive, for borrowers looking for something that suits their individual needs it’s never been a better time to look for a loan.”
Buy-to-let
The buy-to-let mortgage market, one of the most dynamic in recent years, is an example of how existing products are being tweaked to lure in borrowers during a period of relative stagnation. Cotton says buy-to-let products have needed to evolve to meet borrower demand. “An oversupply of homes, because of a stalling in the first-time buyer market has encouraged lenders to drop their buy-to-let rates,” he says.
Rates, once in excess of the residential mortgage SVR, are much softer. According to Ray Boulger, senior technical manager at John Charcol, some are lending at Base Rate plus 0.75 per cent. Lower rental yields have also forced lenders into offering new products that offset the interest rate against a higher fee.
Cotton says: “Having a lower interest rate long-term means borrowers don’t have to raise so much rent, so what we are seeing is mortgages with high arrangement fees based as a percentage of the loan; this allows the lenders to make their margin too. Add to this lower rental cover requirements, and you have a product that is more innovative and takes account of what borrowers need now.” Cotton says lenders no longer have to collect rent worth 130 per cent of the mortgage payments. “There are lenders only asking for 115 per cent cover,” he says.
Boulger admits he would like to see lenders lowering their LTV restrictions in the future. He says lenders can afford to take risks with buy-to-let products and cites recent data from the Council of Mortgage Lenders (CML) as proof of a healthy buy-to-let market. “The CML’s data showed that arrears of more than three months on buy-to-let properties accounted for 0.68 per cent of all loans compared to 0.9 per cent of residential mortgages. We have seen lenders like GMAC-RFC offer an 89 per cent LTV, I expect to see 90 per cent before long.”
But with some lenders actually quitting areas of the market, this threshold might not be breached for some months yet. Martin Reynolds, head of sales at BM Solutions, says the exit of The Mortgage Works from new-build buy-to-let, as well as Accord Mortgages’ decision to delay its entry into the sector were a set back but not a sign of lenders turning their back on the market. Reynolds points out that some lenders are getting worried about lending on new-build in particular and that they have simply taken a step back.
“At BM we are still more than happy to lend on new-build,” he says. “But many of these new properties have extensive discounts and cashback offerings which mean a lender may be increasing their exposure to 95 per cent LTV without realising. At BM we haven’t got an issue with this, what we do is make sure we ask enough questions of our valuers, our solicitors and the borrowers themselves. An awareness of the situation will allow lenders to make a more informed decision.”
Self-certification
Lenders are starting to soften their attitude towards the self-employed, and in fact their definition of self-employment itself, according to Michael Brill, mortgage adviser and a director of Baronworth Investments. He says: “We are seeing some very welcome changes in the way self-certification is being managed by lenders. For example, over the last six months a lot of lenders have allowed employees to take out self-cert mortgages. Many banks used to view someone with a salaried job who wanted to take out a self-certification mortgage as dodgy, but in so many cases it makes complete sense for someone to use the self-cert route.”
Brill says the dynamics of the job market, and the nature of how people generate their wealth is being reflected in the newer lending criteria. “We are seeing more and more people with two jobs, one of those being through self-employment and they want to use self-cert,” he says. “These are people who do not have a total guaranteed income; they may get paid in dividends or via a large bonus. All these people have trouble proving their income but they do have that income.”
Brill claims lenders like Abbey, Halifax and GMAC-RFC are among the most supportive lenders in the self-certification market. “Normally in the case where someone has two jobs, they can get four times their main income and two times the rest, now lenders like these are letting them have four times their combined projected salary.”
Reynolds says lenders are becoming more favourable and Boulger believes the popularity of self-certification will increase. “Lenders have access to such a large amount of information without having to have paper proof of salary,” he says. “The electronic availability means they can feel comfortable – it’s not just a big deal anymore.”
Boulger does not anticipate easier lending though. “It will become faster to process self-cert but people will still need to put down a sizeable deposit, at least 10 per cent, if they have no firm proof of income.”
Sub-prime
The impaired credit mortgage market is set to become the real battleground of the future, according to Reynolds. Lenders previously wary of the sub-prime market are seeing the potential of rich pickings among borrowers who may have a slightly tarnished credit record. Growth in so-called near-prime borrowers has already encouraged mainstream lenders to enter the market. “There has been a boom in the light sub-prime market, what we call near-prime,” says Reynolds.
Cotton admits he is seeing a growing number of borrowers who are falling into the near-prime lending category. “Near-prime is the grey area between high-street, normal loans for people with clean credit records; and those that cater for people with several CCJs, or who have been recently discharged bankrupt,” he says. “What we are seeing is more and more people who’ve got blips on their credit record, which means they can’t go for a normal mortgage. They could have missed a few credit card payments or fallen behind some loan repayments through no fault of their own, for example, after a marriage breakdown or a redundancy.”
Cotton says lenders are prepared to offer these people a second chance. He cites Derbyshire’s new ‘Salt’ near-prime offering as a popular product. But an increase in the number of bankrupts and those taking out IVA (Insolvency Voluntary Arrangements) could prove another driver in the heavy or unlimited sub-prime market. “These people are always going to have to pay more, but how much will depend on how flexible lenders get,” says Cotton.
Enter the credit repairer, a whole new breed of mortgage lender. Linda Will, managing director of Accord Mortgages, explains: “There used to be about six sub-prime lenders in the market. The mortgages they offered traditionally had high redemption penalties as well as a penalty that over-hung the fixed rate period. Now new entrants like ourselves, who have a prime heritage, are starting to offer sub-prime products. Unlike these traditional sub-prime lenders we do not have such penalties because we want to offer these people our prime products afterwards.”
Will says Accord’s two-year deal allows sub-prime borrowers to switch over to a prime product, penalty and fee-free – providing they have a good repayment history. Will says new computer systems are helping drive these offerings. “It allows us to let advisers know when a client’s fixed term is ending. We will then pay them a fee if they switch the customer into the prime offering, but the customer pays nothing and they don’t have to worry about arranging another mortgage.”
Long-term
Security and stability is a popular option for UK homebuyers who have started to embrace larger 10-year fixed rate mortgages. Yorkshire Building Society says its latest 10-year offering has been incredibly popular, but advisers are still sceptical.
Cotton says two, three and five-year fixed rate mortgages are popular among first-time buyers, but doubts 10-year products will catch on in the UK the same way they have in the US and in Europe. What is interesting advisers is the development of fixed rate mortgages that drop rather than increase during the term of the loan.
Jackie Moran, head of sales propositions at Standard Life Bank, says its Rate Reducer mortgage is a fair way of rewarding loyal borrowers. She says: “Instead of luring in customers with initial discounts we are in fact rewarding them for staying with us. It seems a fairer way of rewarding our loyal customers. Standard Life’s Rate Reducers gets cheaper as the term of the loan goes on. The rate decreases four times in the first five years, rather than bouncing up to a higher rate after an initial discount. There are two versions, Freestyle Flexible which is 5.8 per cent for the first two years and 360 which charges 5.9 per cent over four years. There are rates cuts in the third, fourth and fifth year, ending up at 5.4 per cent. This is better value for clients.”
Cotton and Boulger say these new reducing rates were a sign of how the market in fixed rates could change, with borrowers looking longer-term.
Complete package
So, what of the future? Reynolds says lenders are keeping an eye on the development of Home Information Packs (HIPs), which are being introduced next year. He anticipates that the packs will be offered as part of a complete home-buying package and that lenders will start to form alliances with local estate agents or HIP pack providers.
“This could change the whole way mortgage business is done, it may also change the structure of the products themselves,” he says. From mid-2006 there will be a national dry-run of the packs, meaning estate agents will be able to sell properties with HIPs. This will help identify any problems and make changes before they become compulsory in 2007. “We will be watching what happens with great interest,” says Reynolds.
He also claims lenders may start to look at the construction of the property and not the borrower. He says: “The large number of new-build properties planned, and questions over their construction when compared with older properties may become an issue for lenders.”
Samantha Downes is a freelance journalist
