First published by Financial Reporter
In any market, just focusing on the horizon can mean you miss near term opportunities, especially in a fast-moving sector like the mortgage market which is open to so many influences, be those political, regulatory and economic.
In that sense, I’m clearly interested in the underlying shifts in the UK mortgage market, not least how mortgage lenders might react and what that could mean for advisers, the borrowers they seek to attract, and what might be made available to them both in terms of products and services.
So, what might be happening in that regard? First, the very good news, and that’s the continuing, central role of the mortgage intermediary and the compelling demand for advice. Regardless of existing borrowers’ situations, or those who are new to the market, approximately three-quarters of them every year are accessing their mortgage finance through the advisory profession.
The important question is, will that continue? Yes it will, but what the sector is seeing is a shift in the types of products existing borrowers are opting for, and this ultimately will have repercussions for us all.
So, for instance, the market is seeing a notable increase in product transfer (PT) business, which for advisers materially reduces income per case, and consumers are also showing an interest in longer-term fixed products. As we all know, lenders are proactively pricing and promoting five-year fixed rate terms, which can mean that many clients don’t return to the adviser for a mortgage review and in turn this obviously affects some advisers’ transaction levels.
However, when the market does shift it’s clearly important – particularly for the intermediary sector – not just to be aware but to prepare for how this might play out in the medium-to long-term.
In any market, just focusing on the horizon can mean you miss near term opportunities, especially in a fast-moving sector like the mortgage market which is open to so many influences, be those political, regulatory and economic.
Now, clearly, this doesn’t just impact advisers but lenders too. With PTs, lenders may retain borrowers for longer, but so will others, making the remortgage market more challenging for some. It’s perhaps why the larger lenders in particular are going hard at both the PT and execution-only market, in an attempt to retain that business and to reduce the cost of acquisition such as procuration fee payments.
Certainly, in the vanilla/mainstream mortgage space, we might expect that to continue. The fight for such business will remain intense; advisers remain in a very strong position if they can continue to deliver their valuable service to clients and communicate regularly with them in order to maintain that relationship. We should however not under-estimate the will to secure greater levels of direct business even if those very same lenders continue to attract the majority of their mortgage lending via the intermediary sector. It’s one of our sector’s ironies that makes all this interesting.
But, as mentioned, if the available business in this area is getting harder to come by, then lenders might find they need to look elsewhere, or to push more resource and funding into sectors which they have perhaps not been as active in. Where might that be? Not forgetting that they are likely to want business which can deliver good persistency and lifetime value – and where the credit risk is tolerable.
In that regard, it’s not surprising to see a focus on later life lending but perhaps the big battleground for this year and the foreseeable future will be the first-time buyer market. According to recent research by reallymoving, 55.7% of all purchases last year were by first-time buyers, with 14.6% using a shared ownership scheme and 7.3% going through Help to Buy.
I’m recent times, lenders have tended to be on the risk-averse side when it comes to first-timers and LTV, which is why we’ve seen a plethora of Bank of Mum & Dad/guarantor-type products coming to market. Might there now be a realisation from some of the larger lenders that this type of business is finite, and where they might need to move next is into the realm of yester-year, namely potential owner-occupiers with very small or no deposits.
Talk to most people who bought their home over the past 50 years or so, and they are likely to have done it in similar way – with a small deposit and a high LTV mortgage. Last year, in the first half of 2019 however, the FCA Product Sales Data revealed that just 1.1% of first-time buyer loans had an LTV over 95%. In that sense, it could be an untapped market. Or something to be revisited by lenders?
Lest we forget, Help to Buy shifts to a first-time buyer-only scheme next year, and is due to finish completely two years’ later. A lot of water will flow under the bridge before then but for lenders the opportunity might be too big to stay clear of – that is (on the whole) mainstream borrowers with good risk profiles, at the start of their home-owning/borrowing journey and likely to be paying higher rates and thus delivering a better margin.
For advisers too, the first-time buyer opportunity is a compelling one – quality advice and services delivered at the initial stage of a first-timer’s engagement with the profession, can turn into a regular client for the rest of their life, with not just mortgage needs, but protection, GI, conveyancing, legal, and everything else.
So, as we look to where the big opportunities might be in the future, let’s not discount those clients who are just starting out. As the market shifts, and remortgage opportunities stabilise, it might well be that it won’t be the baby boomers who provide the next big market opportunity, but their offspring – most of whom desperately need and value your qualified advice.
Rob Clifford, Chief Executive of Stonebridge
