Self cert still king
The UK mortgage market is one of the most competitive in the world where there is a growing need for lenders to devise new products to obtain market share. Innovation in product development has proved to be one of the determining factors in differentiating the winners and losers. We have seen lenders offer continually rising income multiples yet it is interesting to note that self-certification is still the most popular option in the specialist lending sector.
There are many reasons for choosing self-cert. This route is often taken to save time and can make the difference between securing a property or not. The concerns surrounding self-cert are gradually fading. Lenders’ figures would tend to support the belief that there is no difference in the performance of the loan, whether it is full status or non verification.
In all regions self-cert appears to account for 70-80% of total packaged lending, with the exception of the North. In the North West and Scotland the trend falls. In fact, it would appear the further north one travels the lower the need for self-cert. But the housing market and regional house price variations also dictate the type of mortgage sold.
Remortgage activity remains the single most significant driver in the specialist mortgage market. Evidence from all regions shows remortgaging is a staple across the whole of the UK and while the reasons vary, there is clearly a correlation between the growing amount of personal debt that needs consolidating and the steady increase in remortgage activity in the past few years. There is also evidence to suggest that with property prices continuing to rise, remortgage activity for the purposes of home improvement is a major factor. Interestingly the levels of remortgage activity in the non-conforming market far outstrip that of the overall Council of Mortgage Lender’s figures for the prime market. With CML figures showing remortgages running at around 35% by application type, our figures are running at over 63% of packaged lending and lends weight to the theory that the non-conforming market is sustaining the remortgage market.
The role of packagers in the proliferation of non-conforming mortgages also needs to be better understood. This is a market that requires a specialist knowledge in order to best help the customer and with the many different layers which make up the non-conforming market – be it near prime, light, medium or heavy adverse – intermediaries that take on this market relying on their sourcing system or the cascading system of their favourite lender need to recognise that the danger of providing poor advice due to insufficient analysis of the market is a real possibility.
Thankfully most intermediaries are aware of the advantages of dealing through a packager and with the increasing number of lenders coming into this market, prefer to look to packagers to provide them with the potential lending solutions that most closely match their clients’ requirements and from which they can make a confident recommendation.
It would be easy to make the assumption that with debt levels rising the greater volume of business would find its way into the heavy adverse category. But this would be far from the truth, with less than 3% of applications nationally coming into the heavy adverse category. Even areas with higher levels of unemployment such as Wales and the South West were below 5% of the application total. The reasons for this can be put down to changes in lender criteria which have been driven by the quest for competitive advantage. Customers who only last year might have found themselves consigned to a lower category on the adverse curve are now eligible for better rates and criteria. It is worth saying that there is only so far enhanced criteria can take us and there is already circumstantial evidence to suggest that the statistics in this area will look different next year, given the compounding effect of higher interest rates and growing debt. The likelihood is that heavy adverse applications will grow next year as people’s circumstances deteriorate.
By contrast the near-prime sector has seen consistent growth across the UK, averaging more than 41% of all applications. There has been so little regional variation in this area that it is fair to say that as far as the packager market is concerned the near-prime market is where the current battleground is drawn and where the majority of credit-impaired clients are being placed, regardless of their geographical status. The significant factor backing this statistic has come about as more lenders have turned their attention to making their products more competitive in the near-prime area. The fact that many more clients will now fit into this area might seem to indicate that credit problems are not as big an issue as we have been led to believe. But we will have to wait and see what happens when it is impossible to ‘improve’ criteria any further to ascertain whether lenders are leaving themselves open to greater delinquency with much less cover. In a risk-based business such as this, building market share by paring back on the criteria which was designed to provide extra support and margin to counter the perceived extra risk is a dangerous game. We are reaching a point where the intense competition brought about by increasing numbers of new lenders all seeking advantage is eroding the margin to a point where lenders must be banking that the economic cycle will not turn against them.
Buy to Let
Buy to let activity has been consistent with only two particular hotspots. The West Midlands and Greater London have averaged over 20% of total applications for BTL against an average of just over 11% across the rest of the UK. Non-conforming buy to let is becoming an important component of the market and there is no evidence to show that remortgaging is a key component with an even balance taken nationally between purchase and remortgage.
Self-cert continues to be a major force in non-conforming applications across the UK. Taken with the preponderance of remortgage business being generated, the non-conforming market is demonstrating that it is fulfilling a national requirement for simple access to new funding. That funding is being fuelled by the need to reorganise finances due to debt and the growing reluctance to move which is an overall national rather than a regional trend. Revisiting this data in a year’s time will tell us whether the lenders have gone too far in respect of easing criteria but I expect the requirement for heavy adverse will grow as the need for debt consolidation grows, particularly if the underlying economy falters.
By Lockhart Bruce, Managing Director of Opus Mortgages