"Building societies have recognised that, when it comes to low-risk, low LTV business they are unlikely to be able to compete with the big six and so must look elsewhere."
Part of the continuing strength of the mortgage market is the diverse nature of the mortgage lenders operating in today’s market. At the recent FSE London event there was a panel discussion on the buy-to-let market which principally covered the impending PRA portfolio landlord underwriting changes.
It was suggested that part of the problem with these changes, and those that were implemented at the start of the year, was the differing interpretations lenders made when it came to putting these new rules into practice. Much was made of the varying criteria changes that were being introduced – quite different depending on the lender in many cases – and specifically the interest cover ratios that were being adopted, which again appear to have little uniformity and are being tiered by the type of taxpayer the borrower is, plus numerous other addendums to the requirements.
Someone at FSE London wondered if the industry wouldn’t have been better off if lenders had adopted a common approach in introducing these changes, that is all deciding to go with one method of implementation and one standard ICR. Quite quickly, this idea was shot down by the assembled panel of experts because, as it was pointed out, at what level do you take this common approach? It would have to be a lowest common denominator standard that would probably suit no individual lender – a one-size fits all approach in the mortgage market would not work.
Much of this of course is down the varying structures and set-ups of the lenders concerned, the source of their funding, their philosophies, their appetite to risk, their favoured distribution channels, the list goes on. It would be a very boring marketplace if every single lender was a ‘me too’ version of their peer group, and it would almost certainly mean that only certain types of ‘vanilla borrower groups’ would be getting the funding they need. In a marketplace where increasing numbers of borrowers have unique circumstances, and therefore, unique needs such an approach would disenfranchise vast swathes of needy customers.
It’s for that very reason that I believe the market greatly benefits from those who are not part of the mainstream mortgage market – I’m thinking specifically of those specialist lenders and challenger banks who are increasingly making their mark, but also let’s not forget our much-valued building societies who might (in some circumstances) have a reputation for straight down the middle lending but are actually at the cutting edge, particularly when it comes to finding new niches and meeting the needs of under-served borrowers.
There’s no secret in the fact that, in the later life lending market, for instance we have seen a significant increase in supply lately because many societies are recognising the needs of later life borrowers and also those who would not be classed in any ‘vanilla’ category. Many societies have been active in forging solutions to the ‘interest-only time bomb’ for instance, ascertaining very early on that those coming to the end of such deals, without sufficient money in a repayment vehicle to pay the capital, would need further mortgages and would need to have affordability measured against, for instance, retirement income and the like.
These types of sectors, and borrower types, can be where other, more mainstream lenders, fear to tread; in addition many regional/local building societies have recognised that, when it comes to low-risk, low LTV business they are unlikely to be able to compete with the big six and so must look elsewhere. So, they’ve had to seek out such niches and tailor their propositions accordingly – from our perspective we are very aware of the activity levels of societies in the first-time buyer and high-LTV space; again areas where the very largest of lenders tend to have difficulty getting their heads round and/or feeding cases into their automated systems.
No such problems for most societies who offer individual underwriting and are willing to look at each case individually in order to ascertain affordability. At present, that high LTV activity tends to peak at 95%, but there have been some rumours circling the market that this might be pushed up even closer to 100% - what the regulators might think of such product provision however is another matter altogether.
What this market diversity has meant however is that societies remain relevant and much needed in the mortgage market. Recent figures show societies maintaining their overall mortgage market share with gross lending of £16.1bn in Q2 this year, up 6% from the £15.1bn in the first quarter of 2017. Overall, societies were responsible for 30% of total mortgage market growth during the same quarter.
Working with many societies, especially in the high LTV space, we are acutely aware of their ambitions and their approach to these mortgage sectors. There is a real ambition and appetite to lend to those borrowers who are not ‘vanilla’ but may be outside the norm in any variety of ways. As the circumstances and needs of borrowers change I have no doubt that societies will be leading the way in finding solutions for their funding needs, and from all our perspectives long may that continue.