Reclaiming the outcasts

What is clear is that mortgage rates are at all-time lows, while lending for remortgage and house purchases remains relatively subdued – although confidence is building.

But concerns remain about access to mortgages, with tighter lending criteria introduced by the Mortgage Market Review having an impact mainly on first-time buyers and older borrowers (who can be as young as 40).

Add to them the self-employed; people with complex incomes, such as contractors; and those who have had credit issues in the past, and there are substantial numbers of people at risk of missing out.

The Bank of England’s monthly data on quoted mortgage rates for May shows short-term fixed rates at 1.9 per cent – their lowest since 1995 – while the Council of Mortgage Lenders reports that April saw remortgage and home purchase lending fall while buy-to-let lending rose. It is a picture of reasonable health – certainly better than the dark days of 2010, when gross advances fell to £135bn – and forecasts of total lending for the year of £220bn look achievable.

However, this does not tell the whole story, which is that the mortgage market has changed dramatically over the past year, with a different type of lender emerging.

The introduction of the MMR has quite rightly made assessment of affordability and assessment of incomes more stringent. There are plenty of anecdotes about people being refused loans because of their spending habits or the number of their children.

But some lenders’ stricter criteria have created an opportunity for others to develop new approaches focused on more detailed underwriting, boosting the specialist lending market.

The development of specialist lending has been one of the growth areas of the past year and will continue to be so throughout the year.

Around 60 per cent of brokers believe specialists will take a bigger share of the mortgage market over the next two years

Nearly two-thirds of brokers expect new specialist lenders to launch, while another 13 per cent of intermediaries believe high street lenders will wake up to the potential for growth and offer specialist services as well as adopt different approaches to underwriting. Around 60 per cent of brokers believe specialists will take a bigger share of the mortgage market over the next two years.

Underwriting is the key to what makes the specialist market so important, and the cornerstone on which good specialist lenders can stand out from the rest of the market.

The aim is to use experienced underwriters to make responsible lending decisions based on real-life circumstances, rather than rely on a tick-box approach.

Brokers like this approach because they know that specialists will always try to lend if they believe it makes sense and is responsible to do so. There is a belief that some lenders hide behind a credit score. The customers are creditworthy people who can be helped to buy homes, remortgage or move home where they may otherwise be excluded because they do not fit a standard process.

Around half of brokers believe that 20 per cent or more of their clients would benefit from applying to a specialist lender. Two out of five brokers say 20 per cent or more of their clients have had difficulties proving their income in the past year.

That is the rose-tinted view of the market, but there are challenges. The perception is that high rates from specialists in comparison with the ultra-low deals offered by high street lenders are seen a significant barrier to expansion – 52 per cent of brokers highlighted rates as the major issue.

This is a perception that we, as an industry, need to challenge. Specialist rates will naturally be a little higher than those offered to some customers on the high street, because of the extra work involved in assessing the full circumstances of a case. But we should also work to set expectations, as the 0.99 per cent rates that achieve the biggest headlines are only offered to a relative few. Comparing specialist rates against the marketing rates used by best-buy tables will show a disparity, but this disparity is reduced when compared with high street lenders’ standard rates.

Almost one in three brokers (32 per cent) say clients’ lack of understanding of the specialist market could also constrain growth, which, again, is something that we as an industry need to address, through our intermediaries and educational activity with consumers. There needs to be investment in marketing to inform potential mortgage customers about the opportunities available to self-employed borrowers if they seek professional advice.

Specialist lending will, for many, mean adverse credit and a focus on customers who have, in the jargon, ‘an event’ on their credit file. Those customers are definitely a major part of the specialist market.

Adverse credit issues should be addressed by lenders – there are thousands of people who during the tough economic times have missed payments but who are now in full-time jobs and fully on top of their financial commitments, demonstrating their credentials as responsible borrowers. A credit event does not even have to be a missed payment – there are applications being rejected because people have blips on their credit file due to simply forgetting a payment they were due to make. One example was an application from someone who had taken out hire purchase, and made the payments, but forgotten to settle the small postage fee. Customers like these need a common sense approach.

But specialist customers are more than simply those with adverse credit events on their record. The self-employed – of whom, according to the government, there are 4.5m – are an important part of the specialist mix.

However, many lenders will insist on seeing three years’ accounts before considering the self-employed, while others will only look at the income people take from their businesses, ignoring the company’s profit, which for tax purposes and business reasons they do not take as income. Specialists are able to make lending decisions for the self-employed based on 12 months’ accounts, and some can now include share of net profit for sole company directors in their affordability assessments.

There is the issue of complex incomes. The Association of Independent Professionals estimates there are 1.88m freelancers.

A recent shift in traditional working patterns has seen more people working as contractors. While their contracts may be short-term, many may have been with the same employer for years, simply rolling over the contracts, and many will be earning more than they would as full-time staff employees.

And then there is the issue of overtime and bonuses. You do not have to work in an investment bank to receive a bonus (although it helps), and consideration should be given to those sources of income.

The specialist lending market can address all of these categories by increased use of manual underwriting and a focus on innovation and targeting products to specific markets.

Brokers and advisers have identified the growth potential for more specialist lending, and it is now up to the lenders to deliver.

Keith Street is head of Essex-based intermediary-only lender Kensington Mortgages

Key points

The introduction of the MMR has made assessment of affordability and assessment of incomes more stringent.

Specialist rates will naturally be a little higher than those that are offered to some customers by the high street.

The self-employed – and according to the government there are 4.5m of them – are absolutely part of the mix.