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Market shift means mortgage lenders can now break free
Lenders are starting to take on riskier customers as they try to increase their margins in a competitive mortgage market.
by Michelle McGagh on Feb 19, 2013 at 09:01
Mortgage 'prisoners' may be offered some respite as the market begins to take a punt on riskier borrowers and Clydesdale kick-starts the revival of interest-only mortgages.
The Funding for Lending scheme has pushed mortgage rates to new lows, particularly for fixed-rate mortgage deals. The first to benefit from the impact of the scheme – which has seen the government make £80 billion available to lenders who receive decreasing rates on the money the more they loan out – was those with straightforward mortgages.
We’re talking about people who wanted to remortgage and had a fair chunk of equity in their homes or those with large deposits. The benefits then started to trickle down to the market of people with less equity or smaller deposits. This has created a race for the bottom in terms of rates, but now the lenders have reached the lowest point they can and still make money they are looking towards more risky customers again in order to make more of a margin.
Good news for risky borrowers
‘We are coming to the end of the crisis,’ said Ben Thompson, managing director of the Legal & General Mortgage Club. ‘Risk [in the property market] is reducing and rates have been so low for so long that people have been able to clear some secondary debt.
‘Now lenders are looking at how to grow their margins…Banks have been giving away more margin and some may not hit their lending targets, it is then that the head of risk is going to say you need to take more risk and diversify [borrowers].’
Thompson points to the Barclays Springboard mortgage as a new deal that will be popular. It allows first-time buyers a three-year fixed deal with a 5% deposit for 4.69%. In order to qualify a family member must open a Helpful Start savings account linked to the mortgage into which they put 10% of the purchase price. At the end of the three year deal the money in the savings account is given back to the family member.
Those who need parental guarantees would have previously been frozen out of the market, but lenders are now warming to the idea of taking them on as customers.
‘Barclays Springboard mortgage has done very well,’ said Thompson. ‘Others will start to look at these types of initiatives'.
Mortgage prisoners break free
Thompson also predicts more lenders will follow the example of Clydesdale Building Society, which has launched a new interest-only mortgage. The ‘low-start mortgage’ offers borrowers a three-year interest-only deal which then moves on to full capital repayment after the three years, a half-way house between full interest-only and capital repayment mortgages.
Rates start from 3.09% for borrowers with deposits of 40% or more and increase to 4.49% for those with 20%. Loans are available from £300,000 to £1 million.
‘The Clydesdale product is interesting and it will give it more margin, they are doing something that is new, creative and innovative,’ said Thompson.
Interest-only is an area that could see a resurgence, helping the ‘mortgage prisoners’ who are trapped in their mortgages because they are not eligible for a new mortgage deal.
A lot of lenders pulled out of interest only or scaled it back to only take on customers with 50% loan-to-value,’ said Martyn Smith, head of mortgage products at the Legal & General network. ‘But there is a need for interest-only.’
Smith said the Clydesdale mortgage would only be suitable for professionals, such as doctors, who can guarantee their salary will rise and they will be able to cover the increase costs of repaying the capital and interest on the mortgage.
Interest-only mortgages will become much more robust to prevent a situation occurring, as in the past, when everyone took out an interest-only mortgage.
Thompson said: ‘With interest only people need to take responsibility and have the right risk approach. People who took them out in the past knew they were at the edge of [what they could afford] but house prices were rising and they didn’t want to miss out. We need to have a sensible approach to interest only.’
For self-employed or contractor mortgage prisoners, who are struggling to remortgage because they only have one year’s worth of business accounts or because work is intermittent, there is hope.
Many of the smaller lenders are now willing to look at mortgage applications on a case-by-case basis, rather than ruling you out completely because you do not have the required amount of years’ accounts. This is where the building societies are coming into their own.
‘About four or five years ago building societies were written off,’ said Thompson. ‘But they have much more focus on the customers and this has been a real wake-up call for the banks.’
Smith said smaller lenders put less blanket restriction in place when working with customers.
‘They tend to specialise with more cases and provide personal underwriting,’ he said. ‘Many building societies deal with the self-employed, contractors and first time buyers who have been renting for 12 months. They help because they look at the risk profile on an individual basis, although they may not offer the best rates.’
Although the rates may not be as competitive for those who are deemed more risky, Smith added that a self-employed person with one year of business accounts would become a much more attractive prospect to lenders when they have two year’s accounts.
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