Mortgage market contraction since credit crisis

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Mortgage market contraction since credit crisis

But in addition to the paperwork involved, some commentators believe the process of getting a mortgage for self-employed clients has become restricted over the last eight to 10 years, as a result of the credit crisis, increasing regulation, ever-tightening lending criteria and rising house prices.

Not everyone believes there is a problem.

According to the FCA's Responsible Lending Review in May 2016, there was no evidence that mortgage companies were restricting their offerings to self-employed people.

Charles Haresnape, group managing director for mortgages at Aldermore, comments: "The FCA's review found there was no evidence that mortgage companies were being prevented from lending to self-employed borrowers by the new affordability rules and that the volume of loans had not fallen.

"However, this is not necessarily the view on the ground, and our survey of mortgage brokers in May that year found 86 per cent saying that lenders needed to do more to improve mortgage choice for the self-employed."

In the first instance, lenders became stridently risk-averse after the credit crisis. 

Between 2010 to 2013, advisers and consumer groups were campaigning heavily to push lenders to start lending again, either in terms of loans to businesses or mortgages, because the banks were simply not lending as much as pre-credit crunch.

The government at the time had to force lenders to stop retrenching and start lending; Vince Cable's £70m boost to small business lending in 2013 highlighted concerns that bank lending had all but dried up and something had to be done to get the money flowing again.

Only when you explore a person's financial background can you really begin to assess their true affordability with lending decisions made on a case-by-case basis.Matt Andrews

But prudence did prevail. A snapshot of lending trends among banks and building societies shows the peak of lending in 2007 to 2008, followed by a significant drop-off until recently, according to data from the Bank of England/Trading Economics

Figure 1: Mortgage approvals 2008 to 2016

Buster Tolfree, commercial director of mortgages for United Trust Bank, comments: "Generally, all lenders, either through their own internally driven post-credit crisis learnings or externally driven conduct and prudential requirements imposed by regulators, have become more risk averse."

"The issue", says Matt Andrews, managing director at Bluestone Mortgages, "lies with the strict, automated scoring models used by many high street banks to decide who can afford a mortgage or loan.

"These are often based on simple credit calculations, with little thought given to who is behind the numbers.

"Only when you explore a person's financial background can you really begin to assess their true affordability with lending decisions made on a case-by-case basis."

Lender contraction

In the immediate years after the credit crisis, the number of providers diminished.

Lenders such as Northern Rock, Alliance & Leicester, Bradford & Bingley, Cheltenham & Gloucester have disappeared.

High street names were merged and bought out and subsumed into others.

For example, according to the 2007 to 2008 Building Societies Association yearbook, there were 60 building societies listed. In 2015 to 2016, there were 44 names in the document - including some names not previously listed.

Mr Tolfree believes this contraction did not necessarily mean it was a bad thing for consumers, however.

He explains: "The market contraction, combined with an historically low bank base rate and lender competition has pushed customer interest rates down.

"Some lenders have targeted niche areas of criteria, or under-served areas of the market but generally this race to the interest floor has resulted in abnormally low rates for customers."

And there have been new entrants since 2010 in the banking and specialist lending market, such as Enterprise Finance, Aldermore, Bluestone and the spin-out of TSB from Lloyds Bank, among others.

This has taken the number of lenders - both high street, building society and specialist - up to more than 100 at the start of 2017.

Product contraction

Another contraction has been in the diversity of product offerings. For example, self-certification mortgages disappeared, as outlined in the first article in this guide.

These had been popular 10 years ago but with greater affordability checks came less willingness to lend based on someone's guesstimate of their earnings.

Since then, advisers believe there has been a lack of creativity in forging new products to cater to contractors and the self-employed.

I think we are virtually at a position where there are products to cover all aspects of demand; the skill is in finding them.Rob Sinclair

Jamie Smith-Thompson, managing director of advisory firm Portafina, explains: "There are definitely fewer products on offer".

Donna Hopton, founder of online broker forum Cherry, agrees: "Product range has obviously suffered, as there are fewer mortgages being advanced, hence margin available to create products is much reduced. 

"In addition, with demand for such mortgages being greater than supply, lenders have been able to be less creative in their product ranges."

Not all believe the market has contracted irrevocably for self-employed borrowers. Matthew Bird, independent financial planner for Seer Green, believes the products on offer are "largely the same for employed as for self-employed"; it is just the criteria are different.

He says: "They simply must provide a longer track record of proof of earnings." John Phillips, group operations director for Spicer Haart and Just Mortgages, agrees: "There are just as many products on offer, maybe even more than there used to be, but the criteria is much tighter.

"Lenders appear to be much more reluctant to lend to the self-employed than they used to be."

2017 upturn

For some of the experts FTAdviser spoke to, the contraction is over and the market is on the cusp of a positive upturn. This is the view of Rob Sinclair, chief executive of the Association of Mortgage Intermediaries.

He explains that, over the past couple of years, a range of new challenger and specialist banks have helped to boost diversity and there is hope of more to come.

Mr Sinclair comments: "I think we are now at a healthy point where we had a range of new lender entrants in 2016 with more to come in 2017.

"Many of these are offering non-mainstream products. I think we are virtually at a position where there are products to cover all aspects of demand; the skill is in finding them, as there are now more than 100 lenders with a wide range of criteria, and even the biggest and best firms struggle to have a 'real relationship' with more than 60 of them."

Jane Benjamin, head of relationship management for Sesame Bankhall Group, is also hopeful of greater innovation in 2017.

She says: "Moving into 2017, existing lenders are looking for more innovative ways to lend, and new lender entrants are setting out 'specialist' criteria, with self-employed customers being just one area of focus."

She also highlights several recent government initiatives which she believes will help the mortgage industry "thrive", despite the "challenges of increasing regulation, the housing crisis and the Brexit vote."

These include:

  • Help to Buy.
  • The government's pledge to build 1m more new homes by 2021.
  • The creation of the £18m fund to speed up house building on large sites. Under this, councils can bid for a share of the capacity fund to help tackle planning issues that would otherwise have hindered development.

Moreover, as Portafina's Mr Smith-Thompson adds, brokers who have helped their clients amass the proper documentation should be able to convince a lender of their clients' suitability.

He adds: "If you have multiple years of accounts, you should be able to get a decent rate."

simoney.kyriakou@ft.com