As borrowers’ requirements get increasingly diverse and former ‘mortgage misfits’ start to look normal, do we need more specialist lenders or just better products?
When it comes to helping borrowers with special requirements, mainstream lenders seem to operate a strict door policy: if a particular requirement is not on our list, the borrower is not coming in.
Specialist lenders, on the other hand, have more of an open-door approach and are happy to admit everyone, from zero-hours contract workers to those with County Court Judgments.
In the past 18 months a spate of new lenders have launched on the specialist mortgage scene but, in general, are lenders and brokers doing enough to help those who don’t fit the mould?
The profile of the average mortgage borrower is changing. In 2015 there were around 4.6 million self-employed workers in the UK; just one year later the figure had risen to about 4.8 million. Today the self-employed account for just over 15 per cent of the total workforce. Meanwhile, around 1.2 million people over the age of 65 are still in work, according to the Office for National Statistics.
Specialist lender Magellan Homeloans’ managing director of lending, Simon Read, thinks too few high-street lenders look beyond the age-old mortgage product of capital repayment over 25 years.
“It’s a very old-fashioned view and borrowers’ needs have changed,” he says.
“In other markets they tend to move very quickly with consumer need, but the mortgage market hasn’t kept pace and there is an opportunity for lenders.”
Last year, 912,389 borrowers obtained a CCJ, the most since the Registry Trust’s records began in 2005. This figure had increased from 734,205 in 2015, and it was higher than at the height of the financial crisis in 2008, when the total of CCJs was 830,675. However, the average value of a CCJ fell in 2016, to £1,711 – 16 per cent down on the year before. By contrast, in 2008 the average CCJ stood at £3,624 – more than double last year’s figure.
Pepper Homeloans director of sales Robert Barnard says: “This suggests that firms such as utility providers and mobile-phone companies are taking action against people much more quickly.”
Inevitably, this factor will increase lending demand from these borrowers in future.
The days of the nuclear family – with a breadwinner earning a steady income and retiring on a final-salary pension – are long gone, according to Ian Ward, managing director of packager The Mortgage Partnership. With the exception of specialist lenders and building societies, much of the mainstream market is stuck in a “comfortable time warp”, he believes.
“While regulation in general has been positive, it has struggled to address the awkward demographic represented by non-standard groups,” says Ward.
“There is a reluctance to do more than reiterate that lenders must ‘interpret’ regulatory guidelines, yet it gives no lead on how they will be judged at a future date. It is hardly surprising that large lenders do not want to take that chance and therefore stick with vanilla lending.”
Precise Mortgages managing director Alan Cleary believes there are sectors where mainstream lenders have adapted well.
“The self-employed market has been growing rapidly and a good number of lenders are catering for it, including high-street lenders such as Halifax,” he says. “While it was underserved a couple of years ago, I think it is well served now.”
According to mortgage packager 3mc’s director, Doug Hall, although mainstream lenders are lending to the self-employed, many want to help only the “straightforward vanilla applicants”.
He says: “In reality, that is not how a proportion of the self-employed market works. A lot of limited companies often leave profit within their businesses but mainstream lenders tend not to consider retained profit.”
Director of packager Complete FS Phil Jay thinks lenders have made great strides in serving the self-employed.
He says: “Lenders that want to see only the latest set of accounts, rather than take a more historical view, are able to attract more business. We need more of them.”
In addition, Jay sees scope for both mainstream and specialist lenders to provide more products for older self-employed borrowers.
“Lenders generally do not like the self-employed, who may be working up to the age of 85,” he says. “Lenders need to take a more pragmatic approach: look at individual circumstances and lend accordingly.”
Cleary says many high-street lenders cater for older borrowers simply because the average age of the UK population is increasing.
He adds: “This is a market that is underserved and needs more lenders in order to increase customer choice.”
Jay says Complete FS’s adverse business doubled in 2016.
“There is definitely an appetite from existing lenders and some of the newer entrants to look at credit-impaired, credit-repair, near-prime and complex-prime borrowers,” he says.
“The smaller building societies will consider some lighter adverse but their proposition is low key and volume levels are fairly small.”
Many lenders still run a mile when payday loans appear on a credit file, albeit well-conducted loans, adds Jay.
“We live in a much more buoyant world with everything done faster. Some people choose a payday loan simply because it is convenient. We need residential lenders to understand this and help those people.”
It is not down to lenders alone to accommodate borrowers with special requirements. Brokers too must do their bit to get them queuing at lenders’ doors.
Brightstar Financial has recently launched a campaign to voice its concern for ‘credit crushed’ borrowers. It defines these as consumers who have been turned down for mainstream deals, or have complicated requirements but are unaware of the specialist options available to them, meaning they do not obtain the finance they need.
Brightstar has written to housing minister Gavin Barwell to highlight its concerns. Its head of marketing, Michelle Westley, says most brokers do a fantastic job with these customers but a significant minority tend to unfairly close the door on them.
“We’re not saying brokers should advise in every corner of the market but there is a moral obligation to make customers aware of the lending options available, whether or not the broker chooses to provide specialist lending advice,” says Westley.
“The impact of not having access to the credit they need has the potential to change the course of people’s lives.”
Nevertheless, Barnard believes attitudes are changing. In the past, he says, when brokers might have been rich in leads, if a case came in with a failed credit score they might have had a tendency to put it to one side.
“I don’t think now they have that luxury,” he says.
“Brokers need to make sure they deal with the client in front of them because, if they send them up the road to another broker who specialises in those quirky mortgages, all of their other business will potentially go up the road as well.”
Are brokers perhaps holding back through fear of a return to the sub-prime era?
“Everything now has to be 100 per cent affordable; the old self-cert market has gone,” says Barnard.
“We see people who might have suffered financial hardship in the past due to redundancy, a bereavement or divorce, but are now back on track. We don’t think these people never deserve to get a mortgage again.
“We put them through strict affordability checks and make sure everything is really back on track.”
Finding an edge
Although a steady stream of new lenders have launched into the specialist space over the past 18 months, is the number sufficient to bring in borrowers from the cold?
Read says these lenders have driven down prices but he thinks few of them are offering anything new.
“At least three or four lenders in the pipeline want to get into this sector,” he says, “but I don’t think there is enough demand.
“A lot of them are doing the same job as everybody else. The new guys have targets I think they will struggle with.”
Given that existing specialist lenders are offering some great niche products, any prospective new lender will have to bring something different to the sector, according to All Types of Mortgages managing director Dale Jannels.
“It will take time for new entrants to build up distribution, a name in the market and a loyalty with packagers and brokers, as well as provide a consistently good service,” he says.
Read says product innovation can be difficult for lenders.
“They rely on historical performance data and what borrowers have done in the past.
But if it’s a new product, there is no data to rely on and from which to set risk and appetite.”
The specialist sector has accomplished a lot during the past few years and specialist lenders in particular are doing their best to operate an inclusive policy. However, with the demographic of UK borrowers changing so rapidly, it seems more could still be done.
“I would love to see more high-street lenders take notice of what is happening and look at why specialists are being successful, and then recognise that the risks they perceived are not what they thought they were,” says Ward. “Lending safely and compliantly, and meeting the needs of clients whose stories are not pure vanilla, can be positive.”
Borrowers must be enabled to make informed choices
Gina Blagden, head of residential mortgages, Brightstar Financial
Over the past year we have seen lenders adapt to the changing needs of the UK population by loosening criteria for both adverse lending into retirement and mortgages for the self-employed.
We are definitely seeing more adverse lenders enter the market, with Vida Homeloans coming into the sector in the past 12 months alongside established players such as Precise Mortgages, Pepper Loans and The Mortgage Lender.
An area with some movement is lending into retirement for adverse borrowers. We receive plenty of enquiries from older borrowers and Vida has made an important move by allowing mortgage payments on adverse deals until age 85.
Most adverse lenders offer products with payments until age 70 but we expect this to change as the population becomes ever older and works for longer. Lender competition over criteria will help drive this.
Some lenders already have no upper age limit but do not offer adverse mortgage loans, so it is a welcome shift that we hope continues.
As life expectancy keeps increasing along with the retirement age and people’s average working life, there is no reason why the specialist mortgage sector shouldn’t keep up.
For example, if an accountant can work into her 70s it is perfectly feasible that she can keep on making mortgage payments.
Another area where we observe a shift in specialist residential mortgages is the provision of finance to self-employed borrowers. We have seen a large uplift in demand for self-employed mortgages in recent years because more people are starting their own business.
It took an adjustment period after the financial crisis and when the Mortgage Market Review was implemented but lenders are now improving their self-employed offerings.
For example, many lenders permit borrowers to use just 12 months of accounts for their income verification checks. This is an important shift as it enables newly self-employed individuals to obtain loans after just one year of accounts, which is very useful.
It also means borrowers can use the most recent year’s accounts for an income check, so they can take their best-performing year to get a larger loan. This is with the caveat that there has been no enormous jump, but any accounts where revenues have risen by less than 25 per cent should be relevant. Borrowers can also get up to 85 per cent LTV.
Previously, one year’s accounts could be used with a trading projection for the years ahead, so this change has created an important support tool for borrowers.
Both lenders and brokers have a moral duty to ensure all borrowers receive the appropriate information and guidance to make the right choice.
Too many borrowers are turned away by lenders or not given enough knowledge to realise they have other options available to them. This means they can miss out on purchasing their dream property and it is no exaggeration to say it can alter the course of their life. Borrowers must be enabled to make informed choices.