MortgagesSep 7 2016

Niche mortgages rise in appeal

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Niche mortgages rise in appeal

Specialist lending is one of those catch-all terms frequently found in financial literature that can refer to several different areas.

What is more, it seems the definition of the term is constantly changing. An intermediary operating in the market at the turn of the millennium would have been likely to consider buy-to-let mortgages as a form of specialist lending.

However, that has since become mainstream as high-street lenders increasingly explore different avenues of revenue to supplement waning income from the highly competitive prime mortgage market sphere.

To gauge advisers’ attitudes to the specialist market, Financial Adviser surveyed more than 149 advisers with mortgage permissions.

The findings support the notion that mortgages for landlords have become commonplace. Twenty-six per cent of respondents claimed to advise on applications for such loans once or more a week on average.

The buy-to-let market has diversified to cater to landlords with unconventional circumstances. However, the sample appeared less proficient in complex buy-to-lets. Sixty per cent of respondents claimed to have advised on the area a few times a year on average – substantially below the 97 per cent figure for normal buy-to-lets.

Lenders who want to operate in the specialist market now know the exact requirements to do so, which is largely due to the introduction of the MMR. Rob Sinclair

The recent hike in stamp duty on buy-to-lets and the upcoming changes to taxation on income generated on such properties to a flat rate of 20 per cent has somewhat pushed the market back under the specialist banner.

Whether there is a true definition for this type of lending is open to debate.

Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “I think specialist lending embraces anything that is strange, whether it is in relation to the income type, the funding requirements or the type of property.”

For the purpose of this article, specialist lending refers to sub-prime, second-charge and self-employed mortgages as well as bridging loans and lending into retirement.

Specialist lending has risen to prominence from the more recondite niches of the mortgage industry.

The latest figures from the Council of Mortgage Lenders reveal specialist lenders as well as challenger banks increased their gross lending by 56 per cent last year compared to the year before, translating to a 2.9 per cent growth in their collective market share.

This suggests that advisers are open to securing mortgages on behalf of their clients through young providers. Seventy four per cent of the sample either disagreed, strongly disagreed or disagreed completely with the idea of only going to high street lenders to place buy-to-let mortgages.

The market, as with the wider mortgage industry, took a hit during the 2007/08 financial crisis and in the ensuing years, but numerous financial regulations have since been ushered in.

One of these is the third iteration of the EU Basel directive, which sought to strengthen the regulation, supervision and risk management of the banking sector.

It did so by increasing the minimum level of capital banks and building societies must hold against their loan books on a risk-weighted basis, introducing a minimum leverage level and establishing liquidity requirements.

The introduction of a new system of macro-prudential regulation with the establishment of the Financial Policy Committee at the Bank of England and the Mortgage Market Review have also gone some way in further tightening suitability and affordability lending criteria.

Key points

Twenty-six per cent of the advisers surveyed discuss buy-to-let mortgages with clients at least once a week

Seventy-three per cent would arrange mortgages for people aged between 70 and 90

Thirty-four per cent think that clients with specialist mortgage lending require more advice and guidance

Mr Sinclair said: “The regulatory landscape has evolved with the introduction of income caps on residential loans and buy-to-lets. Lenders who want to operate in the specialist market now know the exact requirements to do so, which is largely due to the introduction of the MMR.

“I think the significance of the Financial Services Authority splitting to The Prudential Regulatory Authority and the Financial Conduct Authority is underplayed. The FSA was a mishmash – it was never quite sure of what exactly it focussed on. It is clear to us that the PRA deals with capital or risk to capital while the FCA measures the risk to consumers.”

Self-certification mortgages, popular among self-employed borrowers, have not made the cut in the heightened regulatory environment.

These products, which allowed individuals to borrow without needing to prove their income, was removed from the market by the FCA in 2014 because of the risk such products posed to lenders and consumers alike.

However, 77 per cent of survey respondents said between 20 per cent and 80 per cent of their mortgage books consist of self-employed loans.

Mike Richards, director of London-based Mortgage Concepts Associates, said: “For me, the split is 50:50. A large number of people come to us because they cannot go directly to the lender. You will now find that some lenders are offering to deal with clients who have just one year’s accounts.”

Lending into retirement is another niche area that seems to have taken off, with several big-name providers opting to relax their lending policy for older customers wishing to move or release equity in their retirement.

Asked what was the oldest person they would be willing to arrange a mortgage for, more than 73 per cent of the sample gave an answer of between the age of 70 and 90, although a further 21 per cent of participants said they wouldn’t arrange a mortage for anyone over 60.

The City watchdog stipulates lenders to assess retirement income and the plausibility of the stated retirement age, but the pension freedoms have muddied the waters somewhat according to Dominic Basilea, director at St Albans-based Aqua Wealth Management.

He said: “I personally think that lenders do not have a clue about how to analyse pension income. If it is an annuity it is pretty simple for lenders when it comes to affordability checks, but I personally think lenders do not know how to assess retirement income from income drawdown. Lenders are in need of universal guidelines to follow.”

Specialist lending products are seldom offered directly to consumers due to the degree of complexity the application process of said products entails.

More than a third (34 per cent) agreed and strongly agreed respectively with the sentiment that clients with specialist mortgage lending require more advice and guidance.

This development of the specialist market thus represents a potentially lucrative opportunity for advisers.

Advisers ranked commercial and semi-commercial mortgages ahead of complex buy-to-lets, second charge mortgages and bridging loans as the area of the specialist market where there are new business opportunities.

Mr Basilea said: “We get some enquiries on commercial and semi-commercial property, but I pass them over to another broker who specialises in the area. It takes longer than most other mortgages and is quite technical – the criteria requirements are greater and the affordability calculations are different.”

Interestingly, survey respondents highlighted commercial and semi-commercial mortgages as the number-one area of specialist mortgages where intermediaries require more education or training.

Bridging ranked second ahead of complex buy-to-lets and second-charge mortgages were in third and fourth place respectively.

Mr Richards said: “There has been a reduction in the number of buy-to-let enquiries following the increase in buy-to-let stamp duty, so a lot of brokers are looking elsewhere – like bridging and commercial mortgages.”

In all, it would seem specialist lending is not regarded as the easiest of advice area by intermediaries. When asked to rate the complexity of specialist mortgages out of one to 10 – with former being very straightforward and the latter highly complex – the majority (67 per cent) of respondents rated it as five or above.

Only seven survey participants claimed to be well versed in the aforementioned specialist mortgage areas.

Myron Jobson is a features writer for Financial Adviser