As regulation, taxation and changing demographics lead borrowers’ demands to diversify, why do some lenders seem reluctant to depart from their traditional product menus?
There are some impressive rates among the 17,000-plus mortgage deals currently on offer to brokers and borrowers. In the opinion of some experts, however, a key ingredient is missing from lenders’ product offerings – innovation.
The blame for this deficiency has been attributed to regulation but is there another reason why some lenders fear indulging in something new?
In October 2015 the Financial Conduct Authority announced it was to investigate barriers to competition in the mortgage sector, including consumers’ ability to access credit. It is due to reveal its findings later this year. In the meantime, many brokers believe that lenders should make a greater effort to cater for those with more diverse requirements.
In particular, brokers crave extra help for self-employed borrowers. Perception Finance managing director David Sheppard wants more lenders to help those with one year of trading records.
“There are lenders doing this but we still need more,” he says. “What the market needs more than anything is underwriters who are more empowered to advocate a case even if all of the elements do not fit in with the criteria.
“We see many strong cases but, even if they tick five or six boxes, if one box is not ticked the whole case fails. As clients become more intricate in their requirements, we need lenders to keep up,” he says.
According to the Office for National Statistics, the number of self-employed people in the UK increased by 106,000 last year to reach 4.63 million at the start of 2016. Brightstar director of mortgages and buy-to-let Chris Bramham says the self-employed market is growing more quickly than any other but it can be problematic for those wishing to get onto the housing ladder.
“It’s not only the lack of products available to the self-employed; it is the lack of lenders,” he says. “There are only a handful of lenders dealing in this space and even those are not looking at self-employed clients as favourably as we would like. There needs to be more flexibility over self-employed accounts and affordability.”
First Complete and Pink mortgage manager Karen Hedges wants lenders to be less rigid over whom they will cater for. She says: “As the dynamics of people’s employment changes, lenders need to adopt a more flexible attitude to clients with different income streams, such as contract workers or people with more than one source of income.”
TenetLime managing director Gemma Harle agrees. She stresses that contractors are a growing part of the labour market, “especially among younger people – yet mortgage availability is distinctly limited”.
Older borrowers too must sometimes feel like vegetarians in a steak-only restaurant, faced with such limited borrowing options.
In February, the FCA released a discussion paper on the provision of financial services for the UK’s ageing population. The message from industry commentators was clear: lenders needed to do more to satisfy the needs of older borrowers.
But despite the pressure being put on lenders, some of the biggest banks have yet to act, according to Trinity Financial product and communications manager Aaron Strutt. Building societies have been keener, he says, following a review of age policies by members of the Building Societies Association.
“If clients can demonstrate how they can repay their mortgage and that they have a pension income, it isn’t fair to force them into equity release or onto a higher rate through one of the smaller lenders,” says Strutt.
Harle thinks current age restrictions should be relaxed and lenders in general need to acknowledge that people are living and working longer. She says: “Residential lenders generally consider applicants up to 75 years old – 85 for buy-to-let – but changing demographics and extended working lives mean they need to get smarter. Consequently, we need to see an increase in the maximum age at the point of application for greater access to borrowing in later life without equity release.”
Harle would like major lenders to stop using the statutory retirement age and instead align their criteria to the changing age profiles and work patterns in later life, in line with the latest ONS life expectancy figures.
“Smaller building societies such as National Counties already use ONS data and others, such as Santander, review each case on its merits,” she says.
“All of them need to adopt a common-sense approach, however, and accept that people are retiring later and earning income for much longer periods. ‘Statutory retirement age’ means just that you become eligible for your state pension – not that you will necessarily stop working.”
London & Country associate director of communications David Hollingworth says mortgage queries from older borrowers come in regularly but the options are limited.
“Those who want to use the equity in their property are a little annoyed when told they can’t,” he says.
“You also have a group of borrowers who have a low-LTV, interest-only mortgage backed by a solid income but the tightening around interest-only means that, as they approach the end of their term, they need to repay the loan or downsize. If lenders depress the term over which borrowers are taking the loan, suddenly that mortgage is being repaid over a very short period and they can get into affordability issues.”
Chadney Bulgin mortgage partner Jonathan Clark questions why lenders cannot create an “interest-only mortgage with no mortgage expiry date”, which relies on the sale of the property as the repayment vehicle.
In response, Hollingworth says: “Interest-only running and running is an interesting idea. You can see why the regulator wants more focus on making sure borrowers have adequate repayment vehicles. But, equally, for the right borrower, is that really going to be a problem?”
SimplyBiz Mortgages chief executive Martin Reynolds believes older borrowers will not see much improvement until some of the larger lenders change their stance.
“We are not seeing much movement from the big lenders and before we get that I don’t think we will see consumers knowing about the products or looking to access them,” he says.
One solution for older borrowers could be a multi-generational mortgage. Clark would like to see a product where different generations can apply for joint borrowing, perhaps with four or more applicants who live together.
“I’m increasingly asked about this,” he says. “Surely it’s a better way of minimising astronomical childcare costs and it could mean that parents/grandparents get to stay at home with their family rather than be put into an expensive retirement village.”
Another area where brokers feel that lenders could be more experimental is offset mortgages.
Sheppard says: “We would like to see more lenders offering offset to give some competition to the few in this market. One glaring area of offset that is not available is the five-year fix on interest-only. It is surprising that this is not available especially given that offset tends to be taken by clients who are quite financially savvy.”
Clark agrees that more offset products are desirable for customers but questions whether they would be “maybe not so good, or profitable, for lenders”.
Hollingworth thinks this is a good time for offset because people are struggling to get good returns on savings.
He says: “Lots of lenders are still offering offset but the family offset is quite limited. It could be that take-up has never been big enough for that market to develop. When the availability of funds started to tighten, I think lenders looked towards their core offerings.”
Brokers also think that some lenders are out of touch when it comes to mortgages for people who work or live abroad.
Following the implementation of the Mortgage Credit Directive, few lenders will take into account income in a foreign currency, says Hedges.
“This restricts product availability to a number of client segments, but specifically clients living in Northern Ireland but working across the border and paid in euros,” she says.
“Clients working for large international PLCs who get posted overseas for a period and are paid in the local currency also come into this bracket, as well as offshore workers – such as those of oil companies – who may be paid in dollars. In some cases this has created mortgage prisoners, which needs investigating and solutions provided for it.”
Strutt, meanwhile, thinks expats need more help. “NatWest is one of the few large lenders offering expat mortgages at competitive rates,” he says. “It would be great if more of the bigger banks and building societies lent to expats again.”
He adds: “Foreign currency mortgages are more scarce but there are still a few lenders left in this market. Santander has limited its workload by restricting the currencies in which borrowers can be paid; these include the US dollar, the euro, the Swiss franc and the UAE dirham. Even though lenders recently pulled out of this market, hopefully they will return at some point.”
When the financial crisis struck, income caps were one of the first things to be restricted. Strutt would like to see some of the larger lenders soften their stance towards income multiples.
“Some of the smaller societies offer more generous income multiples but bigger lenders’ caps have hit borrowers pretty hard,” he says.
“Barclays’ 5.5 times income pilot has been great. Clients have been happy to open premier current accounts to obtain cheaper rates and secure larger mortgages. It would be good if more of the bigger lenders could offer similar products.”
Reynolds feels there is a place in the market for interest-only, which lenders are not fulfilling. “Interest-only is still an area not fully served and I think there are certain client types it fits very well, not just those who have the equity in the property but those with the correct profile as well,” he says.
“There are people we know who have the correct profile but don’t have the equity.”
The Government’s Help to Buy scheme was launched amid a fanfare in 2013 but Harle thinks more needs to be done by lenders to help those looking to remortgage.
“Greater participation and innovation in the Help to Buy remortgage market would be welcome, particularly as Help to Buy loans include an interest-free segment,” she says. “More lenders need to consider Help to Buy equity loan scheme mortgages where the equity is not redeemed.”
The buy-to-let market is growing rapidly but some lenders do not seem to be keeping up.
“I am seeing more people look for specialist buy-to-let products, such as homes with multiple occupancy and student lets, but those products are limited,” says Bramham.
“The buy-to-let market is evolving and becoming a more professional sector; landlords are setting up limited companies and lenders need to evolve their product offering to accommodate this.”
Clark would like to see mortgages with provision for the sub-letting of rooms, to assist affordability. He says: “Lenders already know this often happens but they cannot acknowledge it for legal reasons.”
Meanwhile, Harle wants lenders to spice things up by allowing joint mortgage applications that include people other than the intended owner/occupier. She says: “Most lenders prefer the applicant and owner to be one and the same, so it’s a niche market that has more demand than supply right now.”
Brokers would also like more offset products in the buy-to-let sector. Reynolds says the sector has been talking about this for some time but the idea has yet to come to fruition.
“I think an offset buy-to-let product would work well and I can’t understand why lenders don’t offer them. Perhaps some do not have the capability to link the mortgage to a savings account.”
Strutt says Trinity Financial is regularly asked if it can access offset buy-to-let mortgages but currently there are none available. “It would be great if lenders came into this underserved part of the market,” he adds.
The Chancellor’s recent tax changes have pushed limited company buy-to-lets to the forefront of the market and more clients are starting to ask for them, according to Strutt. But he adds: “At the moment, the mainstream lenders are not as keen as the smaller lenders and challenger banks to offer them. It will be interesting to see when this changes.”
Reynolds thinks the buy-to-let sector lacks a refurbishment product.
“We don’t have a proper refurb product unless you go into bridging and there are still a lot of brokers who don’t fully understand the sector,” he says. “A light-refurb product, such as 60 days in and out, would be good business for a traditional buy-to-let lender.”
Hedges says the buy-to-let market is too broad and lenders should recognise that rental yields are not consistent across the UK.
“Lenders need to take this into account, possibly using property postcodes to allocate different rental calculations, or products specifically designed for certain regions,” she says.
Sheppard thinks London is underserved and says some innovation on rental calculations would be useful for the capital.
“It would be good if, for any other properties in a borrower’s portfolio that are lent on within the group, the lender would look to use any rental excess on those other properties to boost the lending on a further one if the rent did not fit with the calculation,” he says.
He would also like to see new-build, converted and renovated flats given more relaxed treatment by lenders, “even if it is just a case of being allowed only with certain builders”, he says.
Barriers for lenders
So what is preventing lenders from adding variety to their product mix? Reynolds thinks they are reluctant to change their systems to accommodate new products. “We have had a lot of regulation over the past few years that has tied up lenders’ systems,” he says.
He also questions whether lenders have the desire to increase their product offerings for sectors such as older borrowers. “Most big lenders are hitting their targets so their aspirations are being met with their existing lending. In the short term there may not be a need to change criteria along the risk curve.”
Specialist lenders and building societies that cannot rely on mass market distribution are often the first to innovate, partly because this is their only way to boost business and because they rely less on technology than on the human touch.
Kensington Mortgages head of marketing and communications Alex Hammond says delivering a new product to market is reliant on finding a balance between a number of factors.
“First, there needs to be customer demand and, in our market, we often learn about this demand with feedback from our intermediaries as well as more formal research,” he says.
“A lender will then look to address this demand in a way that fits within its own risk profile and operational capability, as well as the regulatory framework. A lender’s risk profile is influenced by its funding and business models and so, although the regulatory framework is consistent, this will differ between lenders.”
Hammond says it is also important not to underestimate a lender’s operational capability in the delivery of new products. “For example, a more complex product that requires individual underwriting may be difficult to support for a lender that uses credit scoring to make the majority of its decisions.
“But while there are a number of considerations in bringing a new product to market, these provide a framework rather than a barrier to innovation,” he says.
Dudley Building Society head of credit Jonathan Moore says building societies, historically, have led the market in delivering new products. He says: “This is partly because of the way they are funded and partly because many of the smaller players decided some time ago not to do away with the core strength of having a human underwriter at the heart of the process.”
He thinks technology will play an increasing part in enabling lenders to bring products to market. “In terms of cost, the ability of a lender’s system to accommodate change is increasingly a major factor in any calculations,” he says.
Association of Mortgage Intermediaries chief executive Robert Sinclair thinks nothing is preventing lenders from innovating but the process will take time. “The market will evolve,” he says. “I don’t think there is anything stopping it from evolving. It’s still finding its way out of the situation it got itself into in 2008. We are eight years on but still haven’t solved all of the problems we had then.”
Change of mindset?
So it seems lenders face temporary hurdles rather than blockades to delivering new products. Brokers are seeing the most demand for mortgages for older borrowers and for the self-employed. These are two areas where a number of building societies and specialist lenders have already adapted and innovated, demonstrating that change is possible. Larger lenders appear reluctant at present to offer more help to these sectors.
The demand is clearly there, which suggests lenders either are unwilling to change their systems or simply lack the desire to take on such business because they are already meeting their lending quotas.
Whether the FCA believes lenders have a moral obligation to help such borrowers will be seen when it releases the findings of its discussion paper later this year. The regulator also has a part to play in reiterating its rules to lenders and being clear on what it deems acceptable.
Larger banks go to great lengths through advertising campaigns to convince borrowers that they are at the heart of their business. It is the perfect time to fulfil those promises by moving away from their traditional set menus and offering more products that are made to order.
Mortgage market failure: Lending to older borrowers
Senior technical director,
At first sight it is bizarre that the part of the mortgage market with the greatest failure is also one where there is a negligible risk of loss to lenders – that is, low-LTV lending to older borrowers.
As the key difference between lending secured on property and unsecured lending is that, in the former situation, realisation of the security is available as a fallback in the event of borrower default, mortgage lenders deem LTV the biggest risk factor.
But regulation has turned this on its head and, from a regulator’s perspective, a 95 per cent LTV mortgage that satisfies affordability criteria is good lending, but a 50 per cent LTV mortgage to someone who cannot demonstrate affordability is not.
This provides an insight into a key reason for the market failure, at least as far as the major lenders are concerned. The CML and BSA both produced papers at the end of last year on the lack of lending to older borrowers and, to their credit, several building societies have since improved criteria for this group. There is still a long way to go but progress is being made.
However, none of the major lenders have made significant criteria changes in this area. The recent FCA announcement in respect of lifetime mortgages – that it is “dis-applying the requirement to carry out an affordability assessment where interest payments are anticipated or required, providing that the specific lifetime mortgage allows the consumer to exercise at any time an option to convert the product to interest roll-up” – is a long-overdue dose of common sense.
I can only assume that, since it is illogical to require an affordability check when there is no mandatory requirement for the borrower to make any payments, the fact that the MMR ever required it was a regulatory oversight.
Smaller lenders and those in the lifetime mortgage market are leading innovation for older borrowers. The option from some lifetime lenders to make overpayments of up to 10 per cent a year on a roll-up lifetime mortgage avoided the FCA’s demand (until this month) for an affordability assessment, and was an effective way for borrowers happy with a long-term fix to get an interest-only deal.
The new 55-plus mortgage from Hodge Lifetime is a further significant advance in criteria for older borrowers. A constraint on pricing, even if a lender is prepared to offer low-LTV mortgages to older borrowers, is the concern about an expected increase in some capital requirements this summer by the Basel Committee, including on interest-only mortgages where sale of property is the repayment strategy.
An ideal product for many asset-rich but cash-poor older borrowers would be an interest-only offset mortgage with the repayment strategy being sale of property on death or on going into care.