"We’ve seen a proliferation of, for example, guarantor mortgages, Bank of Mum and Dad support for deposits, and the like."
When it comes to the UK mortgage market, and in particular, the role of building societies within it, you could definitely attribute this quote to it. After all, while we still ostensibly have a mortgage market ‘dominated’ by the Big Six lenders who carry out the lion’s share of business, there’s no doubting that behind the mainstream veil, there’s a marketplace whose dynamic has changed dramatically.
Take the building society sector – the hardy perennial of the mortgage market and without whom, millions of people would have not been able to secure either their first or subsequent homes. Over the past few decades we’ve seen a fundamental shift here, with large numbers going private or being merged into larger entities in order to survive.
And yet the strength of the sector – specifically in a lending sense – continues. Just last month the Building Societies Association released its lending figures for 2018 which showed UK societies had lent £68.9 billion in mortgage finance, that’s a not inconsiderable rise of 7% compared to 2017. And perhaps undermines arguments that societies are somehow behind the curve when it comes to driving the market forward.
Indeed, when it comes to actively grasping the nettle of the changing nature of the mortgage market and borrower requirements over the past few years, there’s plenty of evidence to suggest that it is actually the building society sector that is leading the charge and developing products which fit more borrowers than ever. Especially those who are nowhere near, what we might call, ‘vanilla’.
And there is also a very strong argument to say it is societies that have pushed the envelope particularly when it comes to the needs of today’s first-time buyer. The BSA figures revealed that approximately one in three of every building society mortgage is to a first-time buyer and there’s been no doubt that many societies have seen this as a growth area for their businesses, particularly in terms of products which require a parental contribution – we’ve seen a proliferation of, for example, guarantor mortgages, Bank of Mum and Dad (BOMAD) support for deposits, and the like.
You’ll no doubt have heard me talk about the need for lenders in general not just to focus on first-time buyer mortgages which need some BOMAD intervention because, quite frankly, not every potential purchaser is lucky enough to have this. My hope has been that societies in particular would take this on board and look to offer more high LTV products which would undoubtedly suit those that cannot call upon friends or family to help them out.
The recent 95% LTV interest-only product from the Newbury Building Society specifically for first-time buyers is perhaps a sign of things to come, although I see it is already causing something of a stir, particularly amongst personal finance writers. The interest-only aspect of the mortgage only lasts for three years and the affordability is measured on a capital repayment basis, but when you announce an interest-only mortgage for first-timers, you’re likely to have some commentators feeling rather angsty.
That said, my view is that it’s a positive product and one which other societies might wish to consider as part of their overall first-time buyer proposition. I remember many years ago, Ray Boulger espousing the benefits of an interest-only mortgage for first-time buyers suggesting it allowed them to get on the ladder, to keep their initial payments down, and in two to three years’ time they could then move into a capital repayment mortgage, perhaps bolstered by an increase in earnings and/or an increase in property prices.
Of course, our industry has been the subject of an ‘interest-only timebomb’ over the last decade so I can see why some are suspicious; however given this type of product automatically moves to capital repayment, then we are heading off at the pass any potential for borrowers to go through an entire 25-year mortgage term and find that they do not have anything in place to pay off the capital of that loan.
As we must always stress, it’s not going to be a product for everyone, and ideally you would have a repayment vehicle running alongside the interest-only element during those first few years anyway, but it still offers those with just a 5% deposit another mortgage option. And that has to be good news. One would hope that the building society sector will continue to offer higher LTV products of this kind and that we can help greater numbers of younger buyers, with smaller deposits, on to the property ladder.
