Specialist providers lend responsibly and underwrite manually, putting their customers in a strong position for when rates rise
Despite the turbulent political climate the mortgage market remains resilient and extremely competitive, with many lenders announcing attractive headline rates.
Borrowers are taking advantage of these deals and we are seeing more and more people borrowing larger amounts in order to take their first steps onto or up the property ladder. Latest e.surv figures show that small-deposit borrowers make up more than one-fifth of the total mortgage market. These commitments may be manageable right now but what if rates do rise?
In the wake of the financial crisis the FCA put robust checks in place to protect consumers from borrowing more than they could afford. Self-certified mortgages were banned and, in 2014, the regulator introduced a 3 per cent interest rate rise stress test to factor in the possibility of future rises when assessing affordability. However, some lenders chose to stress test based on interest rates at the time the mortgage was sold, while others tested against the rate it would revert to. These varying approaches led to discrepancies across the market.
To ensure more uniformity, the Bank of England has introduced a new rule stipulating that lenders must consider how borrowers would react to a 3 per cent rise in their standard variable rate.
Brokers and specialist lenders have a key role to play in preparing clients for a potential rate rise, especially those who are self-employed, have experienced negative credit scores or sit outside the normal borrowing criteria set by the high-street banks.
Lenders also run extra stress tests to ensure that even clients with complex incomes or adverse credit files can afford to borrow responsibly.
In addition to looking at customers’ needs on a case-by-case basis, specialist lenders consider living costs and inflation. Although clients may be able to afford their current level of repayment, even a small interest rate hike could make monthly commitments difficult to afford and previously unforeseen living costs could leave them with little available cash. These types of check help to ensure long-term affordability.
In August 2016, borrowers took advantage of the fall in Bank base rate to 0.25 per cent and the market saw a 40 per cent spike in remortgage customers, CML data found. Many consumers are sitting comfortably on a low variable rate but a Bank rate increase could mean that borrowers seeking longer-term certainty would choose to lock in to a fixed-rate mortgage to help with planned outgoings and maintain stability.
If a customer has a near-perfect credit score and manages to secure a great deal with a high-street lender, it may be that their long-term finances could be affected more than those of customers with specialist products who have considered individual factors as part of a thorough affordability assessment. Increasingly, we are seeing clients opt for a fixed-rate specialist product with the aim of switching to a high-street rate once their credit score has improved. In that sense, specialist lenders offer tailored and affordable lending options while also repairing credit, which acts as a springboard to high-street rates in the long term.
With specialist providers lending responsibly and underwriting cases manually to ensure their client is future proofed, specialist lender customers will find themselves in a strong position when a rate hike eventually happens.
David Chapman is underwriting manager at Bluestone Mortgages