The figures released by Kensington Mortgages recently, as a result of the offer from Investec throw fresh light on the state of the mortgage market from the lender perspective. It also shows that there could be new opportunities for packagers.
Kensington admitted trading conditions have been challenging in the five months to April 30 this year. This has primarily been caused by intense competition from other lenders, particularly those with access to lower cost funding. These include ‘balance sheet’ lenders such as BM Solutions and The Mortgage Business as well as those new lenders funded by the large American investment banks. In addition, more customers are redeeming outside the early redemption charge period, which has reduced the value of new business and the amount of income expected from business already written.
Kensington’s results, in common with other lenders in the specialist market, will come under increased pressure as existing higher margin mortgages redeem to be replaced by the lower margin loans currently being written. In other words, most lenders in the specialist market are completing the same amount of business, or in some instances more, but making less money. I think this scenario will not only continue but may worsen with more competition in the market and reduced volumes, as is being predicted by the Bank of England and the Council of Mortgage Lenders.
With almost all lenders, including some building societies, focusing on the specialist market for growth and a reasonable return on capital, the competition for business over the next few months will heat up.
In these circumstances lenders will focus on retaining current borrowers while reducing costs, so although we may see some lenders launching new retention schemes, the main focus will be on ways that technology can reduce the costs of distribution.
Lenders which have invested millions in decision and application technology will have to get their technology strategy right to cut costs and steamline business processes with their distribution partners. This offers an opportunity for packagers with their own automated decision in principle systems to leverage lenders’ investment.
The focus on the specialist and sub-prime areas as the only areas of potential growth in the market will also be of benefit to packagers. More importantly, the fierce competition in the market will keep products competitive and commission levels high. Packagers can make the most of these opportunities by using lenders’ technology to help reduce their own costs while also negotiating product exclusives tailored to their particular market with their profit margins intact. Technology is now available to make the decision process much easier with online product selection and transactional facilities. Packagers that make the most of these opportunities will be in a position to dominate the distribution market for some time to come.
Frank Eve is managing director of Frank Eve Consulting