A fruitful year

Many thought 2005 would be a quiet year but the mortgage market has seen a plethora of product launches over the last 12 months, says Martin Reynolds

A mortgage may be no more than a means to provide the finance to buy a property, but the variety of products available is genuinely staggering.

Many industry commentators say product development and innovation took a hammering in 2004 as companies prepared themselves for regulation.

And many also believed the first few months of this year would continue to be quiet, as the Financial Services Authority and the mortgage market got used to each other as bedfellows. But how wrong can such forecasts be?

There is no doubt that an air of concern lingered over the mortgage market during January’s dark days. Lenders worried about volumes and advisers felt the tidal wave of business they had been surfing in the previous year slowly subside.

But with the heat coming out of the market, there has been incredible activity on the product front as competition has grown.

Contrary to the belief that a sober start would be made to the year, Mortgage Express launched a product with an LTV of 130%. It was perceived as an effort to combat the problems faced by first-time buyers in the face of huge upward shifts in house prices. There is no doubt help was needed, and Mortgage Express was certainly brave bringing such a product to market.

But fears were expressed in much of the press that the mortgage was leading borrowers too readily into possible negative equity situations. However, the product put paid to the idea that the market would sit back quietly and not worry too much about product development and innovation.

While the concern about first-time buyers and the pressure they are facing has slightly eased during the year, they still face a torrid time.

The housing market in much of the UK may have sat back on its haunches, but given the double-digit rises experienced in previous years, salaries are still a long way adrift and affordability remains a problem.

The government and the mortgage industry has acknowledged that something concrete must be done about this.

In chancellor Gordon Brown’s pre-Budget report, he announced work that the government was doing in conjunction with HBOS, Nationwide and the Yorkshire to bring shared equity schemes to a wider audience.

In a country that has battled so long over the differing merits of private and public ventures, collaboration of this kind hopefully will provide a workable solution for those faced by the conundrum of connecting everyday salaries to space-race house price rises.

AAt the other end of the market, there has also been a lot of development in terms of equity release.

Lifetime mortgages may have been given a boost by their regulatory status, but this will be evened out by the inclusion of reversion schemes under the regulatory umbrella, as announced in May.

New lenders coming into both markets will also bring increased competition into an arena that is set to play an increasingly important role on the mortgage stage.

The Council of Mortgage Lenders says the lifetime mortgage market saw 655m of newly advanced funds in 2002. In 2004 that figure had almost doubled to 1.2bn.

Longer living, poorly performing pensions and rising house prices have all been well documented reasons for this market taking off.

Now better products are available, no negative equity guarantees are in place and the proposition is becoming increasingly mainstream. There is no reason why this will not continue to develop in the future.

In 2005, Bristol & West entered the market while Norwich Union launched its first reversion plan to sit alongside the mortgages it offers in the lifetime market. Retirement specialist Just Retirement also launched its own equity release products, and more are set to follow.

A number of years ago, the idea of paying less than 8% for a lifetime mortgage was entertaining.

But now the concept of paying much more than 6% will have advisers laughing providers out of the market.

The fact that dedicated qualifications have also come to the fore, such as the Institute of Financial Services’ Certificate in Lifetime Mortgages, clearly demonstrates the appetite that is out there to offer the product.

It also suggests that the advent of further jumps in the market’s size will only be a matter of time in coming.

It is not only the young and the old who have benefited from product development this year – investors in the buy-to-let market have also had much to cheer about.

Debate about Mortgage Trust’s decision to exclude buy-to-let lending on new-build properties has been huge, but this in turn should help alleviate the stress on first-time buyers in this area.

The real battle has been in the remortgage market. Across the board, prices have come down. Flexibility and improved features have become standard. This market has a huge amount to offer in terms of professional “The changes in buy-to-let have been mirrored in many niche sectors. Borrowers have been classified more carefully to allow sharper pricing”landlord borrowers and those looking at buy-to-let from a personal investment point of view – something perhaps best demonstrated by Alliance & Leicester.

The bank announced in its half-year trading statement in August that it would be entering the buy-to-let arena in 2006.

Whether this will be affected by the chancellor’s U-turn on residential properties being eligible for self-invested personal pensions remains to be seen. But this seems unlikely as property investment becomes increasingly important to the financial portfolios of its targeted clients.

In his pre-Budget statement, Brown ruled that tax relief would not be allowed on residential property places in SIPPs.

This decision has been met with a mixed reaction in the mortgage industry, as lenders count the cost of plans they had already been put in place.

BM Solutions has set about making its headline buy-to-let rates as appealing as possible, by altering the arrangement fees on its products. In the past, those investing in buy-to- let often did so only for the possible tax benefits.

These are still important, as the launch of Mortgage Trust’s tax guide in the summer showed. But brokers are increasingly driving remortgage business by advising clients to seek the best deals, as they would with their own personal mortgages.

More lenders offering more competitive products seems the order of the day for buy-to-let investors, as lenders go after their share of a market that will be worth somewhere in the region of 14bn this year.

The changes in the buy-to-let market have been mirrored in many of the niche sectors. During the year borrowers have been classified more carefully to allow sharper pricing.

BM Solutions has introduced new categories to its sub-prime range – near prime and extra light – making a total of five in all. As a result, no longer will Count Court judgements of 500 be lumped in with those carrying 5,000-worth of CCJs.

But sub-prime lenders haven’t been the only ones fighting to improve their offering at the lighter end of this market. Mainstream lenders have also worked hard to get a piece of the action.

The most recent development has seen the Derbyshire launch its specialist lender, Salt , in November.

Matching client to product and finding the most suitable mortgage available is advisers’ raison d’鳲e, and lies at the very heart of the FSA’s regulation.

The shift seen during the course of the year, as more and more lenders have moved towards affordability rather than income multiple models, is perhaps the best reflection of how the market is working to meet the needs and demands of its borrowers.

In such a sophisticated and competitive market, only those serving these needs and demands effectively will prosper.

For what was promised to be a quiet year on the development front, as regulation has settled in there have clearly been a series of major surprises.

Even without making mention of developments in areas such as foreign currency and Islamic mortgages, it is clear to see that as an industry we have been busy.

Our market is vibrant. For those who believe that 2006 will offer anything different, perhaps they should lay off the Christmas sherry.

Martin Reynolds is head of sales at BM Solutions