There are now areas of the market that are effectively fought over by lenders from both sides of the divide.You might expect this battle to be won by the large prime players. But in many ways they find themselves at a disadvantage compared with smaller specialist lenders which are able to provide niche products to cater for borrowers’ specific needs. In fact the structure of the market is changing in a way that favours specialist lenders. Specialist lenders have been targeting the near prime sector for some time. Competition is now fierce in an area where there are a lot of potential borrowers compared with more heavily adverse sectors. So-called super-light products are being launched that veer ever closer to the prime sector. The rates charged on these products are almost indistinguishable from prime rates. And the criteria placed on them, including maximum LTVs, have loosened. Meanwhile, mainstream lenders have been adapting their criteria to try and cater for borrowers with minor credit blips. These borrowers can now be offered products at standard rates but the criteria offered by prime lenders, including LTVs and elements of flexibility, are often not as attractive as those available from specialists. This could foreshadow battles across other areas of the market. Specialist lenders could target specific customer segments that are not well catered for by mainstream products. In this way, they could make inroads into what is now considered to be prime territory. The market would become more differentiated between types of borrowers who need certain criteria or special features. Specialist lenders are used to pricing highly differentiated product ranges based on risk characteristics, and using advanced underwriting. For example, specialist lenders might be better placed to provide innovations and criteria for first-time borrowers including higher LTVs and shared equity products than mainstream lenders are, with their comparatively rigid underwriting and product criteria. Economic trends are benefiting specialist lenders, with the number of self-employed and credit impaired borrowers rising. These are areas in which specialist lenders have experience. And the high proportion of mortgages originated through intermediaries also benefits specialist lenders. Specialist lenders have been leading service innovation through internet technology, and can commit to intermediaries fully since they do not have expensive branch networks to maintain. Estimates vary, but specialist lending probably makes up around 20% of the market. There is every reason to expect this proportion will keep on growing and to project that at some point, specialist lending will become the norm. With the dividing line becoming so blurred between the prime and specialist markets, prime lenders will have to adapt to the changing structure of the market to keep hold of their territory.
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