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Niches to boost ditributors

Distributors and packagers face a bright future over the next five years. So says Phil Jenks, head of specialist lending at Halifax Bank of Scotland.

Jenks predicts the specialist market will show the greatest level of growth over the next few years, accounting for 30% of the total UK mortgage market by 2011. He says that the sub-prime market will grow to more than £26bn and the buy-to-let market will be as large at the first-time buyer market by the same time.

“The reality is, it is the specialist market that has driven all of the growth in the market since 2001 and it is the part of the market that will sustain it between 2007 and 2011. And there is no reason why packagers can’t be successful in the marketplace, because they are trading in those parts of the market that are showing the most growth,” he says.

Jenks says the main reason why distributors should feel confident about their place in the market is because lenders such as HBOS have recognised the importance of packagers as a distribution channel.

He says: “The market actually favours the business models of distributors, subject to them controlling their costs overall in the marketplace.

“As a big lender, we will support packagers with access to distribution. We don’t see them as anything other than a key distribution source. And the economics say distributors represent the part of the market which is growing.”

Not only will the specialist market remain strong but HBOS believes more and more niches will emerge, offering further opportunities for packagers to develop expertise and offer services to brokers. Niches that are likely to emerge include equity share and self-build products. And while they will move into the mainstream market over the next couple of years as well, they are two areas where Jenks believes distributors should be taking the initiative in providing help and support to brokers who are likely to know very little about them.

Meanwhile, he says lenders are also beginning to respond to the changes in the buy-to-let sector with more innovative product design and better criteria. He says the buy-to-let market is fragmenting, enabling distributors to add value to brokers by using their expertise in specialist markets.

Jenks says: “Although there are concerns around portfolios in buy-to-let, all I can say is HBOS is very confident in this sector and, if we could, we would back an even greater share in the buy-to-let market. Investor confidence is massive and all the research says investors are going to hold onto a property for 10 years, so it is not a short-term investment. Virtually every investor that has any real portfolio of properties – so more than three – is confident in the market and is looking at increasing their portfolio. And house price inflation would have to sink to well below 4% to trigger any sort of concern about investment returns.”

Jenks does have concerns about the self-cert market, however, saying the market is being continually narrowed. Of all the specialist sectors distributors depend upon, it is the one HBOS is most concerned about as a lender. “We have brands within HBOS that are doing non-income verification products when, really, they should be self-cert cases and I would suggest as an industry that packagers have got to watch out for that,” he says.

Of all the markets, the prime market is one that HBOS sees showing little or no growth. The lender says the reason for this is continuing affordability constraints that mean first-time buyers are becoming increasingly unable access prime products.

Jenks says although there has been some product innovation that is likely to create opportunities for first-time buyers, HBOS does not believe there has been enough innovation to create growth this year. He adds that if distributors want to become involved in the prime market and can work with lenders on product innovation and create better products they may eventually see some growth in their prime business.

But he warns there will have to be enough value for the lender as well. “The other thing is lenders’ retention strategies are going to eat away at the remortgage market and whether packagers like it or not the reality is we have to be able to broadly predict the average life of loans and, therefore, lenders will either work with intermediaries and packagers on retention or will do it on their own. It is primarily a mainstream issue but it will roll out into the specialist markets,” he adds.

Overall, Jenks says, while the mortgage market saw significant growth in 2006, gross lending will not reach the same levels over the next five years. HBOS believes gross lending is likely to average £330bn during this period. Jenks says the pressure on interest rates and affordability are likely to take effect. Moreover, house price inflation is less likely to be as high in 2007 as in previous years. Jenks says HBOS expects 4% compound house price inflation over the next four or five years. But he does not see lending at £330bn and 4% to 5% house price inflation as a bad thing.

Nor does Jenks see any real deterioration in the housing market. “The market will stay relatively strong and stable because, frankly, we know we need around 209,000 new homes built each year in the UK and we can’t build enough homes, we can’t sort out planning permission and we can’t release land. We have no idea of how to get up to that 209,000 new homes and consistently year on year we will not build more than 160,000 of them so there is an imbalance, which is good news for most in the mortgage market.”

Moreover Jenks says lenders will stick with distributors, providing it makes economic sense to do so. While the strategy of HBOS is to continue to distribute mortgages through its direct channels, Jenks says the lender is committed to distribution through packagers. He adds HBOS is committed to a policy of avoiding dual pricing saying: “The reality is we know distribution is more expensive through packagers but we have accepted that as part of the game of getting access to certain business and certain brokers.”

Packagers, he says, have access to markets that lenders simply can’t get to by trying to go direct through brokers and so are a source of expertise in the specialist markets. But he adds: “One of the things packagers must do is help brokers through compliance. I understand the concerns some packagers may have over that but I am concerned about brokers in 2007. The Financial Services Authority will spend some time looking quite hard at the relationship between the broker and the packager and we cannot afford for the health of the packager community to get that one wrong.

“The reason it will become an issue this year is because the FSA has done the work on all the big lenders and their direct distribution channels and they have come through that pretty clean so the FSA has got to look elsewhere now.”

But Jenks warns there are some clouds on the horizon in terms of quality and inequality issues, a slightly stalling housing market and technology.

Jenks says distributors must ensure they help their lender partners control their costs and that the way to do this is through investment in technology.

“There are still people that spend more on money their company car than on technology. There are not very many of them but there are some. At HBOS over the next couple of years we have around £20m to spend on technology systems where we want to make a step change and we want to do it talking to the packaging community. We don’t want to do it without them as there is still a big distribution opportunity for us so we do see value. But the reality is there has to be sustained improvement.

“At The Mortgage Business we are still getting 40% of our business on paper and we all know it is not the most efficient way to get that business.

“The good thing about technology is distributors don’t need to do anything too difficult. And investment in technology should be about providing better service to the broker at any rate. So it shouldn’t be something that really disrupts the business models of distributors and it should help with their cost base. It would also narrow the gap between lenders using direct to broker distribution and working with the packager community.”

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