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Mortgage green shoots - Jonathan Cornell

Mortgage green shoots

As we approach Spring the long winter nights start to get shorter as it gets lighter in the evenings and mornings. The same seems to be happening with the mortgage market. The misery of 12 months ago seems to be slowly fading as rates improve and criteria relax in the same way that bulbs are emerging from the ground.

In any industry where there are a few large players which can pick and choose the size of the own market share, you would expect competitors to enter to try to take advantage of this lack of competition. However the mortgage industry is slightly different. Whilst the costs to enter the market are pretty high, there remains a very significant barrier to entry in the form of the Financial Services Authority (FSA), the industry regulator. It is being very careful with which new lenders it allows into the market. In the good years there were dozens of new lenders but when the credit crunch hit most of them either pulled out or went bust so the FSA is keen to ensure that new entrants have a business model which would survive in a tough market as well as a benign one. We have just seen MetroBank obtain its banking license approval, so it will be able to offer mortgages from its branches. We have seen a prospective mortgage lender Checkmate rebrand itself as Portillion and recruit a board of financial heavyweights who have seen firms through previous recessions. This week we have also seen a little know bank called Aldermore announce plans to distribute mortgages through brokers starting in the second quarter of this year. There are a number of other lenders waiting for FSA approval in the wings. Whilst none of the new entrants will challenge the major high street lenders every new lender will increase the amount of competition and this should benefit borrowers as rates will driven down.

In any spring there is always the occasional frost to remind you it isn’t summer yet. In the past few weeks we have seen Halifax announcing it is going to withdraw guarantor mortgages. Guarantor mortgages have helped large numbers of borrowers get on the housing ladder. Relatives were able to guarantee loans of those borrowers whose income weren’t enough to allow them to borrow as much as they needed to buy the property they wanted. Halifax has cited a lack of demand and explained that borrowers can use a scheme through Lloyds whereby relatives can deposit funds with the bank and borrowers can use that as a sort of deposit. If there is a real lack of demand it was strange to see that Nationwide Building Society launch a totally new sort of guarantor mortgage via its specialist lender The Mortgage Works. Under the new scheme there guarantors can limit the size of the guarantee. In the past they have been responsible for the entire mortgage if the borrower defaulted.

We have just seen Nationwide Building Society move away from income multiples to a system based on individual borrower affordability. Income multiples were for a long time the method lenders used to calculate how much it would lend to borrowers. the amount a borrower earned was simplied multiplied by 3 or 4 times to come up with a figure, whilst multiple based lending was simple, it was a rather blunt tool and took little account of how much a borrower could really afford. It meant a married person with 5 children could borrow the same amount as a single person with no dependents if they earned the same salary. With an affordability based model the amount a borrower can borrow is based on their income and outgoings with a calculation on how much it costs them to “live”. This is a great move and will ensure those who can afford to borrow more can do so.

One of the most innovative products I have seen in a long is 3DCM’s new mortgage rate cap. This is a way of capping the cost of your mortgage without having to remortgage away from your existing lender. For those with mortgages linked to the Bank of England base rate this is a great way of ensuring that when the base rate goes up your mortgage remains affordable. Interest rate caps are very popular with large companies whose borrowing costs aren’t fixed which want to cap the interest cost they will pay.

None of these lenders , products or changes will make a single massive change to the mortgage market in isolation but together and with the other small steady improvements they will mean that arranging mortgages should get easier and hopefully cheaper.

Jonathan Cornell

Jonathan has been involved in the financial services industry for more than 15 years. He is current working a number of freelance projects, including working part time for First Action Finance as Head of Communications. He has a BA in Economics and an MBA. Jonathan lives in Guildford, Surrey is married and has a one year old son.

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