Product problems

24 October 2011 | By Robert Thickett, Samuel Dale

The likes of shared equity, shared ownership and guarantor mortgages have been touted as ways of helping first-time buyers, but do first-time movers and those looking to remortgage also need assistance? And what types of products need to be introduced to provide support?

Mortgage Strategy, in association with Nationwide, invited the great and the good of the industry to debate what could be done to improve product innovation.

WHAT TYPE OF PRODUCTS DOES NATIONWIDE HAVE TO HELP FIRST-TIME BUYERS AND OTHERS TO THE HOUSING MARKET?
Ian Andrew: We’ve been heavily involved in the shared equity and shared ownership market over the past few years and do a reasonable amount of business with both schemes. We’ve introduced a limited liability guarantor product through The Mortgage Works to stimulate demand among first-time buyers and get them on the housing ladder. But it’s had limited success and we haven’t seen the volumes we were expecting.

IN TERMS OF ATTRACTING FIRST-TIME BUYERS iNTO THE MARKET, IS IT A QUESTION OF HIGH LTVS OR CAN MORE BE DONE?
Andy Pratt: More innovation is needed, particularly for guarantor-type products. But something needs to be done for first-time movers too as it is limiting the number of transactions taking place, which obviously hinders first-time buyers as there are fewer properties available to them. Unless those people feel like moving, first-time buyers will have limited properties available to them.

Ben Thompson: First-time movers are a big problem the costs of moving, including Stamp Duty, are prohibitive. It started increasing in earnest around the late 1990s but those who moved in the early to mid-2000s could afford it because they could pay Stamp Duty from the equity they could release in their property. That’s no longer the case. Nowadays those selling their homes are seeing values reduce by between 10% to 15%. So for existing home owners who bought over the past six to seven years and want to move, it’s a difficult decision they have to consciously save up to do it.

Pratt: The underwriting position for people who have owned a property for four or five years should be looked at. If they have been paying the mortgage, sometimes in difficult circumstances, for three or four years lenders should take that into account. And products need to be designed that specifically cater for borrowers who want to move due to family circumstances.

Andrew: Are you suggesting a higher LTV for first-time movers than for first-time buyers? Yes, or a staged increase in the rate. Something is needed to get that sector moving otherwise those people will stay on historically low SVR rates until they find they have to move or the market opens up again.

Martyn Dyson: There are differences in terms of what lenders will provide. For example, for existing borrowers we will go up to 95% LTV because as you say, they’re good quality customers and we want to look after them. If the circumstances are right we may have a negative equity proposition as well but it varies across the market and you are right that all the focus has been on first-time buyers.

Jonathan Cornell: Many borrowers have been on high LTV interest-only loans that have stopped them from moving. Hopefully in the next batch of documentation for the Mortgage Market Review we’ll see some sort of softening on interest-only. This would allow lenders to take a more common sense approach and get people moving again.

WHAT MORE CAN THE INDUSTRY DO TO GET THE MORTGAGE MARKET MOVING AGAIN?
Carlos Thibaut: I’ve attended countless meetings over the past two years about product innovation and what we can do, but the bit that seems to be missing is collaboration. No lender has a structured process of collaboration with intermediaries, for example, in terms of product design. When it comes to a variety of product areas there are things that we don’t understand as brokers, such as balance sheet requirements under Basel III, and it would help if we worked together.

Some of the things brokers do not understand include whether a lender’s ratio of 95% LTV lending is eight or 10 times its balance sheet requirement at 50% or 60% LTV and how it treats second charge loans, unsecured loans or credit cards. But lenders understand such things and in a structured collaborative process they could educate us about them. There doesn’t seem to be much discussion about this at the moment.

Dyson: Over the last few years we have seen a gradual focus on innovation to find ways of supporting the market, but recognising some of the constraints around capital, liquidity and spending is important. But it’s also fair to say that with some schemes, like shared ownership and shared equity, there’s a danger that every 12 or 18 months we get a new scheme which is slightly different to the last one. Relatively subtle changes in criteria and process can create big challenges in terms of implementing them.

Areas where there is collaboration between the industry and the government to find a more consistent way of supporting these schemes might help the market as well.

WHAT CAN BE DONE TO HELP THE LARGE NUMBERS OF PEOPLE WHO ARE STUCK RENTING GET ON THE HOUSING LADDER?
Thompson: We have a massive population of tenants in their mid to late-30s who have been stuck in the same place for the last five or six years. Ordinarily they might turn into first-time buyers but due to the cost of renting and affordability they can’t. So linking renting with buying a first home feels like a mass market to me. It’s similar to the way negative equity was a trap in the early 1990s. I’ve got a number of friends in their late 30s who have been renting for six or seven years and can afford a mortgage but can’t get one because they haven’t got a big deposit.

Rob Jupp: We recently had a product with a small building society that was what you describe. It was a 95% LTV product for first-time buyers who had been renting for 12 months and could prove they could make regular payments. To me that’s common sense there was no credit impairment and the take-up of that has been positive.

The focus has got to be first-time buyers. They are the oxygen of the market. The reason why we’re in such a fix with house sales and the exponential growth of buy-to-let is that first-time buyers cannot get on to the ladder. The innovation we will start to see in the next six to eight months, such as Castle Trust’s partnership mortgage, is going to be targeted at getting first-time buyers into the market, maybe with coordinated funds where they can take a 70% LTV product with someone taking a second charge or shared equity in those schemes.

Andrew Montlake: That’s just a return to how it used to be. When I bought my first flat many years ago I had a 75% LTV mortgage with Portman Building Society, with a Norwich Union top-up loan. Norwich Union’s top-up was tremendously successful I had about 13.2% on that top-up loan but the blended rate meant it was affordable and cheaper than renting. It’s not rocket science. It’s been done in the past and can be done in the future.

ARE PROSPECTIVE FIRST-TIME BUYERS CONFUSED ABOUT THE OPTIONS AVAILABLE TO THEM?
David Whittaker: If you throw too many options into the market, such as shared ownership, shared equity and guarantors, consumers may think it is too much for them. Innovation is great, but let’s not flood the market as we run the risk of confusing consumers and they will step back. If we’re going to have guarantor mortgages for the next five years because the market needs them, then there needs to be a consistency of messages with all lenders preaching the same thing to create confidence.

We’ve all seen markets where the rates have been horrendous and consumers have ploughed in but here we are at the bottom of the market where rates are low but consumers don’t feel confident about entering it.

Phil Whitehouse: Some brokers avoid first-time buyers completely because they think it is too much hassle.

Jupp: I’m staggered to hear that.

Andrew: That’s a good point if you look at a couple of innovative schemes we launched recently, like the limited liability guarantor product and the light refurbishment deal on the buy-to-let side, both have been available via The Mortgage Works exclusively to brokers and yet take-up has been low. Is it not just the case that many brokers default to two-year fixes and trackers?

David Hollingworth What first-time buyers want is a straightforward 95% LTV mortgage as was available in the past. They are waiting for such deals to come back. We are starting to see those deals return but only in small numbers. Consumers are going to have to get used to the idea that innovation is the short-hand that the mortgage industry uses for doing high LTV without actually doing it. So at the moment many are waiting for something that isn’t coming back or is going to take a long time to return. As time goes on I think they’ll start to explore other options.

Government-backed shared equity schemes have always been taken up and consumers will gradually get used to the idea of a guarantor as well. They will start to understand how it works and the risks associated with it.

WILL GUARANTOR MORTGAGES BECOME COMMONPLACE?
Greg Went: It comes back to simplicity and trying to get schemes out that customers will understand and that intermediaries can sell with ease. There are a lot of individual schemes in the market but maybe a collaborative approach on one of them that the entire market backs can make such products reach a mass market scale.

We touched on our limited liability proposition earlier and even if I say so myself, it’s an ingenious product, but it is complex to understand. It works well with brokers because they are better at explaining it to customers but to take that to mass market perhaps it does need a collaborative approach across the industry.

Thibaut: Possibly, but I don’t see much research at the moment about first-time buyers. We’ve done some focus groups with our clients and what comes out is that first-time buyers want it simple. They don’t want to go down the guarantor or parent route because they recognise that pensions are going down, people are living longer and that there is poverty in old age. Even if their parents say they want to help, a great percentage of first-time buyers want to do it on their own.

Jupp: There also needs to be an acknowledgment that for many first-time buyers this is an uncertain time to buy a house. They are waiting to see if there is a second recession around the corner. We need to have a period of normality where we don’t have some sort of drama every week.

Andrew: A lot of first-time buyers can’t get on the market because of the deposit requirements and there is evidence that some can but are choosing to rent.

IS IT FEAR OF UNEMPLOYMENT THAT IS CAUSING PEOPLE TO CHOOSE TO RENT?
Thibaut: Actually in our study the feedback from first-time buyers was that should they get into trouble with repaying their mortgage there is a sophisticated range of measures in place to act as a safety net. If they are in rented accommodation and have a problem with their job they will be out straight away and the landlord will not be sympathetic.

Thompson: A lot of that is symptomatic of a lack of confidence. Legal & General did some research about three or four months ago with some 2,500 people and two out of three felt they couldn’t buy because their credit wasn’t good enough or they didn’t have a big enough deposit. Again, this comes back to the earlier point that there needs to be a consistent message to first-time buyers about what they can and cannot get.

WHAT ARE FIRST-TIME BUYER NUMBERS LIKE AT THE MOMENT?
Montlake: Enquiries seem to have been holding up. They can’t buy for several reasons but the main reason is that the properties are not there. We have enquiries on our desk from buyers who would move tomorrow if they could just find a property.

Pratt: New properties are not being built and people are not moving.
Montlake: The second reason is criteria a wealth of things have happened to them in their lives, which are not major and would have been accepted a few years ago, but these little tweaks mean they can’t get a mortgage now. And the other thing is perception when I meet people and tell them I’m a mortgage broker the stock response is that you can’t get a mortgage.

COULD MORE BE DONE TO RE-ENERGISE THE REMORTGAGE MARKET?
Andrew: A lot of borrowers can’t remortgage because of LTVs and interest-only. Their incomes have changed or they now have to prove their income when before they didn’t.

Thibaut: With remortgages, the issue is the potential time bomb waiting to go off as soon as interest rates go up this is a massive problem and opportunity in the marketplace. There are a number of niche areas such as divorces and I think it’s madness that there isn’t more creativity in allowing the moving partner to do something about releasing equity so they can buy. But it strikes me that creativity in the remortgage market is a more likely recipe for success than on first-time buyers. I can only see the government getting behind something if it creates a level of consumer confidence and relieves pressure on disposable incomes.

WHAT WOULD YOUR IDEAL PRODUCT BE?
Cornell: Longer-term fixed rates with flexibility, such as deals with an early redemption charge-free period or payment window would be a good start.

Hollingworth: Capped trackers.

Thompson: In terms of first-time buyers, someone who is spending £1,600 on rent a month and the mortgage payment is £920 can easily demonstrate affordability. The question we ask lenders is whether a system can be built that has a mandatory overpay facility to reduce the LTV. So a first-time buyer could move into their first property at a good rate at 95% LTV but be forced to overpay by a certain amount every month to bring down their LTV. The response we get is that it would be a difficult product to get away largely due to technology constraints.

WHAT CAN THE GOVERNMENT DO TO KICK-START THE MARKET?
Thibaut: Relying on the government could mean we’re waiting for a long time. It had an opportunity with quantitative easing. QE could have been targeted towards unsecured credit cards, first-time buyers or at lenders’ balance sheets. There are a range of things that the government could have done with £75bn of QE and it hasn’t.

Whittaker: The history of government intervention in any market is always disastrous. It needs to look at what it can influence directly, that is, Stamp Duty. It’s the only regime of tax in this country that is non-progressive.

Thompson: There’s a balance between getting the market going again and reigniting another boom. As I understand it, the underlying agenda is that the government doesn’t want too much demand in the market at the moment because of potential house price rises. So suppressed demand from the Bank of England at the moment is probably a good thing.

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