Many feel that the best way to stop the high street banks from paying themselves obscene bonuses and from lurching from one scandal to another is to provide them with some worthwhile competition.
And there is certainly no shortage of new organisations in the mortgage market trying to do exactly that.
Aldermore Bank and specialist lender Precise Mortgages, which both entered the UK mortgage market in 2010, have certainly provided useful additional options in the intermediary space in areas like buy-to-let, near-prime and bridging loans.
Aldermore, which only uses credit scoring in the initial stages, prides itself on the fact that every one of its mortgages is looked at by a human being rather than the numbers simply crunched by a computer.
Precise, although not yet prepared to get involved with the new build sector, can be particularly good for borrowers that other lenders are no longer interested in and has also launched a standard range of prime mortgage products this September, enabling it to claim the widest mortgage range in the UK.
Standard & Poor’s director of financial institution ratings Giles Edwards says there are a lot of new names moving in as both new and existing banks are attracted to mortgages as a product and realise there is a degree of dissatisfaction with existing players.
“These days you can make money from day one of a mortgage as margins have steadily widened but at the height of the boom in 2006/07 banks were just lending to maintain market share and would make very little money in the first two years, only on the back book,” he says.
Another significant entrant in 2010 was Metro Bank, although to date its involvement with intermediaries has been limited to a pilot with John Charcol between July and September 2012 and to conversations with half a dozen other brokers with which it is planning a controlled roll-out.
Metro Bank, which is only focusing on London and the South-east, already has 12 stores there. Its whole proposition is based on old-style bank manager-type face-to-face service and convenience, and, although credit scoring is used, all mortgages are written manually and hand-delivered to customers. The store network is open early and late seven days a week and it actually does more business outside core banking hours than within them.
Further competition to the major lenders is coming from:
- Handelsbanken, which has offered British customers local-relationship banking based on traditional values since 2002
- Tesco Bank, which entered the mortgage market this August and offers customers Clubcard points on their repayments which can be used for shopping at Tesco or exchanged for rewards
- The Post Office, which launched fully into the mortgage market in 2009 and began its first phase of introducing specially trained mortgage specialists in its branches this August
- M&S Bank which, albeit part of HSBC group, will be starting to offer mortgages next year in branches open twice as long as those of the traditional high street banks.
And we also have the addition of Virgin Money. Sir Richard Branson’s finance arm wasn’t offering mortgages when it acquired Northern Rock’s 75 branches last January.
By contrast, despite all its many problems Northern Rock has been the UK’s seventh largest lender over the last two years. Northern Rock Asset Management, the so-called good bit, did gross lending of £4.2bn in 2010 and £4.9bn in 2011. Total balances outstanding at the bank stood at £39.2bn at the end of 2010, down from £45bn the year before. But Virgin aims to lend £45bn of mortgages over a five-year period.
Additionally Co-operative Bank, which already had 342 branches, including those of Britannia, signed a non-binding heads of terms agreement to acquire 632 branches from Lloyds this July and is working towards a binding sale and purchase agreement later this year.
John Charcol’s senior technical manager Ray Boulger points out that while the two acquisitions are similar, you could argue that Virgin will potentially provide new capacity quicker than Northern Rock could have done.
“Whereas The Co-op won’t actually provide new capacity by buying branches off Lloyds,” he says.
Nevertheless, The Co-operative Bank’s image as a customer-led mutual organisation with no shareholders could be highly significant as all the indications are that the sheer numbers of banking scandals during recent years are finally making consumers switch their allegiances to what they perceive as more trustworthy alternatives. Events this summer, when each month seemed to have a different set of notorious headlines, appear to have represented the final straw for many.
“It is a little too early to say how it is going to impact on mortgages but we are seeing a real flight to trust, particularly for current account business, and a lot of the focus on the Lloyds deal is about increasing the reach of our overall banking business so that it gives us opportunities to cross-sell products like mortgages,” says The Co-operative Bank’s head of mortgages James Hillon.
“We have seen a 66 per cent increase in the number of customers switching their main bank account to us this summer.”
The Post Office and Metro Bank also volunteer strong jumps in demand for their products generally this summer as a result of disenchantment with some of the major players. The latter reports that enquiries rose by around 10 per cent following the RBS computer crash, and by a similar margin after the Barclays’ Libor rate-fixing scandal.
So, with so many new entrants and such widespread disillusionment with the high street banks, are we witnessing the beginnings of a revolution that will completely transform the face of the UK mortgage market?
Not surprisingly, major banks – and, indeed, building societies – express no fear of significant inroads being made into their patches during the next few years, although most dutifully acknowledge that competition is helpful and that new entrants are welcome.
“New entrants probably haven’t made an impact on the mortgage side yet as the market is currently very rate-driven and they are not in the best buy tables, although that could change in a few years’ time. You need to be financially strong to be in the best buys, so it’s a slow process to get a foothold as a leading lender,” says HSBC spokesperson Mark Hemingway.
Nationwide’s managing director of group intermediary sales Ian Andrew says new entrants, especially Aldermore, have been quite innovative in the intermediary market.
“But they have limited access to funding, so volumes are very small,” he says.
“We have noticed them but they haven’t had much impact in terms of rivalling major players or increasing the size of the market.They are getting a little bit of traction but it is hard to see how they can grow volumes without access to funding, and it’s hard to see where funding is coming from in such a competitive market.”
And that appears to be the general lay of the land in the short term. But London & Country’s associate director David Hollingworth says he expects Tesco and Virgin to make their presence felt in due course.
But for the time being new entrants are useful more from a marketing perspective rather than funding.
“The new entrants are more important in terms of profile than capacity for mortgage lending and, even if you throw them all in together, they are still very small relative to the size of the market,” says Standard & Poor’s Edwards.
“Remember also that the area of unfilled demand is at the high-LTV end and generally I don’t think that new entrants will want to be at this end until they first understand their ability to write risk appropriately.
“They will not want to launch in with high volumes of new lending before testing systems and underwriting, and they know that intermediaries are reluctant to deal with lenders without proven service capabilities. Putting in a product with a very high LTV may result in getting swamped with demand, so most will develop a business and then look to push boundaries.These guys can all carve out reasonable niches and make mortgage lending a decent bolt-on to other products but the impact on the mortgage market won’t happen quickly.”
Only Metro Bank has a mission statement bordering on the provocative. It aims to have 200 branches and one million customers in the South East by 2020 and may even eventually enter other geographical areas.
Metro Bank’s commercial director Paul Marriott-Clarke believes the bank is already having an impact with rival banks extending their opening hours in areas where Metro Bank also has a branch.
“We are not here to be a niche player but to revolutionise banking in our chosen areas, and we believe we already have revolutionised it in London and the South East,” he says.
Most of the newer players are not guilty of volunteering wildly unrealistic growth visions.
Indeed, Aldermore Bank, Handelsbanken and Precise Mortgages state that they have no actual targets at all and are happy to grow in line with the opportunities that occur from the ground upwards.
And as Precise Mortgages’ managing director Alan Cleary points out, for the so-called challenger banks to challenge the major lenders it will take time.
“It’s all about finding good credit risks and good margins and we are not focused on being in the top 10 by volume,” he says.
“Anyone who thinks that competition to the big six mortgage lenders, all of whom have been in existence for at least 100 years, is going to come along quickly will be disappointed.”