In terms of new arrivals, the specialist market is beginning to resemble Clapham Junction. A plethora of lenders have been joined by more intermediaries focusing on the sector, in addition to packagers demanding ever more competitive mortgage products and rates.
The attractions of the specialist lending sector are plain to see. According to the Council of Mortgage Lenders (CML), the market for non-conforming is worth some £25 billion – up from just £1 billion in the mid 1990s – and it is growing six times faster than mainstream mortgages.
This is in addition to anticipated growth in the number of self-employed who may require self-certification mortgages or the development of buy-to-let into a mature marketplace.
Risks are higher in specialist lending but so is the potential to make larger profits. However, despite the expansion, we are running the risk of having too many providers chasing business.
Near-prime
For borrowers, strong competition has meant more choice of products with improved terms. This is the case at both ends of the spectrum. There is now an extremely active near-prime market with the high street also attempting to win business. At the other end of the scale, former bankrupts and those with Individual Voluntary Arrangements (IVAs) are being targeted by a small but growing number of lenders and brokers. Most non-conforming products are now sold with no overhanging early repayment charges and with both fixed rates and discounts.
Near-prime, for example, has only come into being in the past couple of years and typically is offered to those with less than £1,000 of CCJs and no arrears. It previously would have been categorised as light adverse, which is now generally viewed as applying to those with some £3,000 of CCJs and around two months of arrears.
Because lenders have softened their criteria, near-prime has developed into a distinct category encompassing many borrowers – in fact, it is estimated that nearly half of all non-conforming business written is currently in this sector.
Because such rates are often barely above prime, this has resulted in a further squeezing of margins.
Increasing market share
As more entrants have moved into the market, existing lenders have sought to innovate to increase their market share. We have more higher loan-to-value products, higher income multiples allowed, products such as non-conforming buy-to-let and more lenders prepared to offer on non-standard properties and those considered less attractive such as ex local authority.
We can expect to see more lenders look to offer second charges, loans for overseas homes and niche products aimed at religious and migrant groups.
Offering easier borrowing terms has seen the industry castigated in some quarters, particularly by debt charities and some MPs who say the UK is risking property meltdown. Some of this is just headline grabbing, but the industry must exercise caution.
There is evidence that an increasing number of repossessions are former buy-to-let properties. Some lenders now refuse to lend on new builds for buy-to-let – there may well be plenty of good buys out there but we can expect to see a few more landlords come unstuck.
As a whole, figures from the Department for Constitutional Affairs for the third quarter of 2006 show a 15 per cent rise in repossessions at 34,626 compared to 2005.
The recent rate rise and the fact that more are predicted for next year also does not bode well.
High stakes
Competition is not going to go away and mortgage lenders cannot just batten down the hatches and wait for the good times to reappear. Meanwhile, it is essential to maintain spend in business development, marketing, technology, product development and of course, people.
For this however, it is obviously easier if you are an established provider with a known brand, experienced employees and a healthy balance sheet.
The stakes can be high. If insufficient business is coming in, a lender may need to dip into its reserves. Write too much high risk business and you can end up with a disproportionate amount of defaults.
If a lender attracts the attention of a rating agency and is downgraded, then it may lose further business from intermediaries who must ensure they provide their clients with best advice. Likewise, listed companies are likely to have increased share price volatility in a difficult market which will impact on shareholder dissatisfaction and negative press comment.
At Platform, we have nearly 10 years experience of lending in this sector and are backed by a solid parent in Britannia Building Society. You need to be good at what you do and have strong teams in place – although no one is immune from the endemic problem of staff poaching.
The next few years are likely to see some mortgage lenders decide that the specialist lending sector simply requires too much investment to prove profitable. Certainly for those who stay the course, there is no room for complacency. It could well be a case of survival of the fittest, even if there remains much untapped potential.
