Getting the best deal for your customers requires even more know-how

Until recently, the rapid repricing of products on a monthly basis has been the driving force for change in the mortgage industry. Brokers, their borrowers and lenders have faced new pressures to get the right product to the right borrower at the right time. Securing pricing always matters but when products are being launched, withdrawn, and launched again sometimes in a matter of hours, the pricing tends to get the headlines.

The cost-of-living crisis has meant borrowing costs matter. The real story of the last few months has been the shift in focus away from just pricing to criteria and affordability as the key driver of applications and new mortgage originations. It has played a fundamental part in the growth of product transfers too as stretched borrowers seek to secure cheaper new deals without undergoing new stress tests on their borrowings.

But what about those for whom a product transfer is neither the right answer nor possible? The Consumer Duty rules that became part of our new way of working will in due course shape new thinking on product transfers as we all begin to work out what ‘the best outcome’ really means. Basel 3 will also challenge the perceived lack of property assessment currently undertaken with product transfers.

As a result, the focus on affordability for brokers and lenders will not abate. Everyone faces the same challenges: setting the ideal pricing without getting caught off guard, then inundated, losing margin, and compromising service quality. While speed and efficiency are still essential for effective lending, mortgage affordability has emerged as the new front in the lending war.

As lenders and brokers adjust to the new climate, they have witnessed a shift in the market's priorities, which now sees risk management through the lens of affordability and worries less about house-moving chains and more about people's ability to afford to remain in their homes.

It is a moving feast with three familiar parts.

Pricing

Swap rates are on the way down and as the year draws to a close so are mortgage interest rates. Fixed mortgage rates are continuing to fall back from their summer peak, with a number of fixed rate deals now less than 5%.

A succession of base rate hikes and disappointing inflation figures saw average two-year fixed mortgage rates reach a high of 6.86% in the summer, according to Moneyfacts, while five-year fixed rates hit 6.37%. However, with the rate of inflation falling back and the Bank of England's decision to hold base rate both earlier this month and in September, lenders have begun slashing rates. Five-year swaps are currently at 4.19% and two-year swaps are at 4.7% - both trending below the current base rate. Only as recently as July, five-year swaps were above 5%. Similarly, the two-year swaps were coming in around 6%.

Criteria

Of course, one way to address affordability issues is not only to deal with expenditure at source but to seek to reduce monthly payment exposure for a borrower. Many lenders now lend to an older age of 80 and include pension income. We’ve increased our maximum age at the end of mortgage term to 80 years old and will consider lending to an applicant’s 80th birthday based on their current income, where the applicant is under 50 years old, they are at least 10 years from retirement, and they are actively contributing to a pension scheme. Additional applicants outside of this can be considered too and we have extended the maximum potential mortgage term from 40 years to 45 years.

Of course, the basics still apply. The size of the loan still matters, as does the size of the deposit though there are plenty of products out there designed to help with this such as Joint Mortgage Sole Proprietor, Gifted Deposit products and Guarantor mortgages to name a few.

Employment status and income too are important as lenders take increasingly pragmatic views of modern working practices in today’s gig economy. Whether a borrower is a permanent or temporary member of staff, a freelancer, self-employed, or part of the afore-mentioned gig economy, there is likely a lender who, with the requisite proof, will find a way to help.

Of course, expenditure is key now, but the crude mechanisms quickly introduced at the beginning of the credit crisis are now largely more refined and reviewed quarterly. Mercifully mortgage affordability checks were axed earlier in the year which means lenders can look at their risk appetite differently and we have already seen higher LTV lending increase as the perceived risk of higher rates has dissipated.

Reviews of ONS data, the most used external source to check against client supplied information on expenditure are now conducted regularly amongst lenders. The knee-jerk practice of adding 10% to ONS data which saw a few lenders exit the market has been replaced by a much more nuanced approach of dealing with certain lines with specific targeted uplifts or reassessments in the case of some items like energy.

Criteria and affordability are not the same thing, the former reflects an appetite for risk the latter a specific borrower element to achieve a loan, but it is in the middle ground that there has been a lot of change over the past 12 months and brokers should expect more to come.

Service

Pragmatic, sensible underwriting is now a central part of any lender’s armoury. Vanilla lending is almost a thing of the past (for now) and many lenders are actively looking at how they can play in the more lucrative credit-impaired markets. This means there will be an increasing number of criteria changes to product ranges and so it is very important brokers do not slip into default recommendations of product transfers especially when rates are falling.

In conclusion, mortgage lending remains about price, criteria, and service but these are all moving pieces. The landscape is not the same from one day to the next and though while the recent headlines may lead everyone to believe things are getting easier, getting the best deal for your customers requires more know-how, and understanding of the specialist landscape than ever before.