First published by Mortgage Introducer
If the past is a foreign country, then what does that make the future? A distant planet never to be visited?
I ask because the chatter around the mortgage market can often be about the themes that are likely to emerge in the course of the next six months, the next year, the next decade, and of course having one eye on the future is undoubtedly important.
If you can somehow get ahead of the curve or ‘get in’ before others, then you have a clear advantage and one that can bring with it plenty of rewards. However, the future is always uncertain and what might seem like a ‘dead cert’ are often anything but.
Reviewing a lot of market commentary recently there appears to be a suggestion from a growing number of sources that the outlook has the potential to be adverse. I’m struggling to remember a time – certainly post-Credit Crunch – when adverse credit and the providing of mortgage finance to those with it, has been so high up the market agenda.
Indeed, this might be said to be something of a Lazarus-like comeback for this part of the mortgage market, because in that immediate period around the start of the last decade, you would have thought its days were numbered, for good.
Pricing for risk?
Clearly, as time has moved on, regulation has rightly tightened, and lenders have become more comfortable with pricing for risk, the adverse credit mortgage market has grown. And now, in light of the pandemic and lockdown and the impact on many people’s finances, there is talk that it is about to benefit from a surge in borrower need.
Some are even wondering whether lenders, who previously might not have touched this part of the market with a barge pole, are now going to relook at that decision. Certainly, we have a highly competitive specialist residential lending community but whether the potential for a growing number of adverse credit borrowers, coupled with the greater margins available in this space, will bring in more mainstream operators is I think open to debate.
In fact, I would go so far as to say that it looks highly unlikely. Firstly, are we entirely certain that a huge number of newly impacted borrowers with newly-acquired adverse credit are coming to market? I recently saw research from Pepper Money which talked of six million people in the UK having some sort of adverse credit on file but whether that means a significant, new, currently unsatisfied requirement for more mortgage lending in this space remains to be seen.
And, as pointed out, that adverse credit borrower looks increasingly well-catered for by the specialists. Bigger, more mainstream lenders don’t appear to be busting a gut to get into this space either, which might suggest they are not expecting great swathes of borrowers to be requiring this type of finance.
In my view, those mainstream operators are much more likely to focus on the type of mortgages, in the type of product spaces, that they were active in during 2019, for example, rather than dropping into entirely new parts of the market. So, for example, we might well see more competition in sectors such as shared ownership, mortgages for the self-employed, guarantor mortgages, and the like, but their risk appetite and their ongoing aversion to, what might be perceived as too much risk is likely to see them steer clear of adverse borrowers.
Which, of course, is not to say these borrowers don’t require advice and mortgage products, but I’m unconvinced by an argument which suggests thousands, if not millions, more borrowers will be coming to market with adverse credit. Indeed, the economic outlook appears to get better with each week, and while we can’t quite know how the end of furlough will play out, particularly in terms of increasing unemployment, our hope is that the doom-mongers are not proved right in this regard.
In essence then, the number of adverse credit borrowers might inch up, but it doesn’t seem likely to be the huge wave anticipated by some. Greater choice in this part of the market will always be good news for advisers and clients, as it would do in any other part of the market. Mainstream lenders are likely to stick to their established markets and sectors and allow the specialists to show their expertise in this space, and while product availability may well increase, we shouldn’t expect a flood of new entrants, particularly if demand remains relatively steady.
Rob Clifford is Chief Executive of Stonebridge