The UK mortgage market has endured a tough time in recent years but finds itself with many reasons to be positive in 2014. It’s also preparing for some significant regulatory changes that are influencing the market dynamics and strategies of key players.
This piece is intended to provide an independent overview of the UK mortgage market. Whilst it will be of interest to those working within the industry, it’s primarily aimed as an informative piece for those in the broader FS industry or related sectors, who have an interest in understanding the current market trends.
We’ll look at the current trends in relation to some of the most influential strategic components of the UK mortgage market: distribution, products, and funding. We’ll also look at the threats to what is currently a resurgent mortgage market, and consider what it might take to succeed.
The mortgage market has rarely been out of the news in recent months and the Help to Buy scheme has certainly grabbed the headlines, but it is just one of several changes that are helping to shake-up the market. The impact of the likes of the Mortgage Market Review (MMR) and the EU Mortgage Directive are creating strategic opportunities and challenges across the market and will continue to do so.
In overall terms, the UK mortgage market is growing, and at an increasing pace. New lending in 2013 grew to around £170bn, and this year the forecasts range from £190-205bn. The market peaked at a heady £340bn in 2007, but has dropped as low as £140bn in recent years.
There is an almost unanimous agreement that there will be an increase in the percentage of mortgages arranged via advisers in 2014, driven primarily by implementation of the MMR.
The MMR represents the biggest regulatory shake up in the mortgage market since it became regulated by the FSA in 2004. Previously many customer requests / tasks could be completed by administrative staff, but now a great many more aspects of the application and servicing process for residential mortgages must be undertaken by qualified mortgage advisers. This has created a training and resource issue for lenders, who need to upskill significant parts of their workforce so they are qualified to offer advice. In turn, this is an opportunity for brokers to fill the void while lenders train their employees.
The split of mortgages sold by intermediaries vs those sold direct by lenders in 2014 will be at least 60:40, and could get as high as 70:30. Historically 60:40 has been the norm, although during the credit crunch it was 50:50 at times as lenders favoured direct distribution for what were vastly simplified product ranges.
The flip-side is that if the lenders find their resources are under-utilised they may look to drive up direct volumes. This could potentially lead to an increased amount of dual pricing, whereby consumers get a better deal by applying directly rather than via an adviser. The general view in the market is that this scenario seems less likely.
Within the broker market the picture looks slightly different depending on the regulatory status an adviser firm holds. Things look particularly positive for Appointed Representatives (ARs) of networks. Many within the industry feel the FCA favours this route to market over Directly Authorised brokers, as the network oversees compliance rather than the FCA directly. Adding weight to this argument, some new specialist lenders coming to market have adopted an AR-only distribution policy as part of winning the FCA’s approval. Certain lenders are even offering higher procuration fees to appointed representatives, although this has been a controversial move and has been criticised by many leading market commentators.
An emerging trend is for lenders to pay brokers higher introducer fees. This demonstrates the importance of intermediaries to lenders’ strategies, and illustrates that after a few years of lenders calling the shots, the boot is now moving back onto the other foot.
Some lenders are now also paying higher broker fees based on the quality, rather than quantity of business introduced. At this stage, it’s hard to gauge whether this trend will stick, and whilst big names such as Santander and Lloyds Banking Group are already committed, the likes of Nationwide, Barclays and RBS have said they won’t follow suit.
Product choice is increasing but there is scope for expansion and innovation in certain areas of the market.
Contrary to popular opinion, the biggest issue in the market today is not a lack of available products, but a shortage of housing supply. It’s an issue that is being addressed, and consequently the new build sector could be one of the most interesting areas of the mortgage market in the coming years. It’s likely we will see innovation around new build and self build properties, with aspiring homeowners being given support and incentives to go down these routes.
There are gaps in the market where demand is not being met. Help to Buy and low interest rates have certainly helped to boost the attractiveness of mainstream products. However, some key niche areas of the market remain under-served, including non conforming, adverse credit, and first time buyers with deposits of 5% or less.
What we’ve seen in recent months/years is lenders, particularly the largest ones, move into the ‘comfortable middle’ and flooding the market for high quality borrowers who can put down 20% or more as deposits. Lenders prepared to consider near prime or adverse credit borrowers currently have an opportunity to create sought after products and earn healthy margins. Magellan Homeloans has been one lender to enter this space, although their recent announcement of rate reductions across their range (including existing loans) shows that borrowers are still rate sensitive even if product choice is reduced, and also that lenders are keen not to be seen to be profiteering.
Equity release, for years mooted as an obvious complementary product to the market, should be making a bigger impression by now. Recent reports of a record year in 2013, combined with the inevitable links between an ageing demographic, underperforming pensions and locked up value in property must surely mean the market will see significant growth soon. A lack of consumer awareness and understanding still seems to be holding equity release back. If this issue can be addressed, demand for the product should swell, and this could lead to an increased number of advisers striving to gain the additional qualifications required to sell what is undoubtedly a specialist product.
In terms of a general market trend, fixed rate mortgages are set to dominate new lending, as the prospect of a future rate rise becomes clearer and borrowers opt for certainty.
The options available to lenders are increasing and becoming more attractive and viable, and it’s no surprise to see that several new lenders are set to enter the market.
It has been claimed that the FCA has received 21 applications for new banking licences. This number could prove to be higher or lower as mergers, acquisitions and de-mergers are all set to play a role in creating increased competition in the banking sector. Indeed, in the week before this blog was published, one new lender announced its launch and an existing one was put up for sale.
Funding strategy will be a key driver in how the market landscape evolves in terms of product providers. Retail funding remains favoured by most banks and building societies, and could also pave the way for the life and investment providers to enter the market in a development that has long been speculated but to date has yet to materialise.
Securitisation could play an increasingly significant role in the market towards the end of the year – HML, the mortgage servicer, recently predicted 2015 would be the year of securitisation, but with the market moving quickly again, that could easily be brought forward.
The fast growing peer to peer lending industry offers an innovative new source of funding and there are early signs of this being used in the mortgage market, but it is unlikely to make a significant impact in the near future and is currently better aligned to other lending sectors. The implementation of FCA regulation in the sector from April is widely predicted to lead to further exponential growth in the volume of lending activity though, so things could look quite different this time next year.
Perhaps the most interesting source of new mortgage lenders could be the secured loans sector, which will also be regulated by the FCA from April. From this point, the regulatory process for offering mortgages, secured loans and further advances will be aligned, making it logical for lenders to operate in all three sectors. Those secured lenders with ambition and sufficient funding could make a big impact in the specialist lending market, which is where they are most likely to choose to operate.
So with so much to be optimistic about, what is threatening the mortgage market in 2014?
Rising interest rates are more likely now than at any point in the previous 12 months, albeit still deemed highly unlikely in 2014. A rise in rates would certainly increase the possibility of repossessions or put the brakes on consumer spending. Politically, with an election in 2015, you wouldn’t expect a Government to risk poor economic news.
MMR implementation could be a drain on resources and lenders really can’t afford to compromise on implementation. In the extreme, we could see the big lenders increase their pricing or withdraw products if they need to ease the pressure on their processing teams. Clearly this could threaten the forecast growth of the market.
The EU Mortgage directive was passed in December 2013 and the UK will likely be required to implement it by early 2016. Whilst many elements reflect those already contained in the MMR, the regulation could significantly impact the way mortgages are offered in the UK. Essentially, it could mean that consumers will be able to obtain a mortgage from any lender in the EU, although there are enormous differences in the way the UK and other EU markets operate. One of the reasons few lenders currently offer mortgages on properties across borders is that the legal processes and credit reference agency information are different in every single member state. Unless these differences are harmonised, cross-border lending is generally not viable and can be more easily addressed by setting up localised subsidiaries in different countries.
Could speed be the key to success?
Whilst there are significant developments afoot in distribution, products and funding, it’s likely that lenders will struggle to find a significant competitive advantage against their peers from any of these areas. It may be that a well executed combination of speed and service can give them the edge.
Mirroring every other trend in life at the moment, speed is now becoming critical in the mortgage industry. This was the case in the past, but in recent years more emphasis has been placed on manual underwriting and non-automated decision making.
Things are different now: lending appetite has stabliised and gazumping is back in vogue, especially in London. Consumers once again need to be able to act quickly to secure a purchase. So fast decisions backed up by high quality levels of service could just be the silver bullet that advisers, lenders and other stakeholders will be striving for. All will be on a quest to woo consumers and win more than their fair share of this growing market.
Julian Wells has worked in the UK mortgage market for nearly 15 years and has experience across a number of areas of the market including working with lenders, brokers, distributors, technology firms, conveyancers, asset managers, and outsourced mortgage servicers. Whitecap Consulting is actively involved in the mortgage market. If you would like to discuss how our services could help your business, please get in touch.