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Boulger on Mortgages

After an interesting and often tumultuous 2004, mortgage intermediaries and lenders are hoping that 2005 will bring innovation in products and a lively, competitive market.

Intermediaries enjoyed a buoyant market in the first half of 2004 but the introduction of statutory regulation in the second half of the year saw a dip in lending as lenders got to grips with the new regime.

One lender says: “Anyone who claims they have not seen a decrease in lending since November 1 is lying. Everyone has suffered.”

Interest rate rates have also taken their toll on the market, alongside the expected seasonal effect on house purchases. Yet the industry is largely confident that there will not be a housing crash this year.

The Council of Mortgage Lenders predicts a 4 per cent growth in prices in 2005 in its forecast for 2005-07. While it expects gross lending to fall to £271bn compared with £293bn in 2004, it believes this will be a result of fewer transactions rather than a reduction in prices. Transactions are predicted to total around 1.23 million compared with an estimated 1.64 million in 2004.

CML economist Jennet Vass says: “Although our forecasts indicate a slower market, there is good news for first-time buyers over the long term. Essentially, as earnings grow, houses are likely to become gradually more affordable again.”

Purely Mortgages marketing director Ian Giles is less optimistic. He says: “2005 will be a difficult year for the housing market. Affordability has been strained for a while and consumer confidence is falling as the full impact of interest rises and tax burden increases are felt.

“But January will see renewed mortgage activity. We expect to see lenders launching new rates by the second or third week of January – the first major repricing exercise since before M-Day.”

Charcol senior technical manager Ray Boulger says conflicting house price reports and fear of rates rising further caused the rapid loss of confidence in the housing market. But he believes confidence will return when enough people realise that rates have peaked and predicts that 2005 may also see lower rates. “The cost of fixed-rate mortgages has already fallen from the mid-2004 peak and is still falling,” says Boulger.

Purely Mortgages chief executive Mark Chilton believes remortgaging will be the flavour of the year. He says: “The mortgage market will be dominated by rate-led remortgaging across the board next year. With the upward pressure on interest rates slackening, the 2005 product mix is likely to be dominated by discounted base-rate trackers with fee-free products.”

Platform sales and marketing director Guy Batchelor believes there will be growing interest in equity release this year as more lenders come into the market, perhaps threatening the dominance of Northern Rock, Norwich Union and Mortgage Express. As more customers seek financial advice on estate planning and inheritance tax, he says intermediaries will be asking for greater innovation and choice.

Batchelor believes e-commerce will be the most talked about topic, with more lenders taking the lead of BM Solutions and working towards an increasingly paperless environment.

Savills Private Finance director Simon Jones says: “Further efficiencies will be introduced as a result of the investment in systems, particularly the electronic transfer of data between business partners.

“We expect to see some interesting products for first-time buyers in the New Year, with more family offset/guarantor mortgages on offer as lenders have spare capacity and seek to stimulate the market from the bottom up. Shared ownership and keyworker schemes will also shed their previous stigma and be high profile in 2005, with providers introducing more products.”

With lenders looking at an increasingly competitive market, they will be looking to create strong relationships with intermediaries. But it is still unclear how many mortgage intermediaries will be around in 2005. Since the introduction of regulation, there have been rumours as to what has happened to the missing 3,000 – those mortgage intermediaries who have not registered with the FSA to become regulated.

Some in the industry suggest that many intermediaries have made a conscious decision not to register, having made their targets for the year, and are taking the opportunity to assess the landscape before making a decision.

The Mortgage House mortgage expert Patricia Cohen says: “I know some mortgage brokers who have taken a month or two off to assess their situation and make sure the market is stable before they commit to anything.”

Another regulatory issue that may have an effect this year is key facts illustrations. The FSA has expressed some concern that KFIs vary widely in content and detail but says it would be unlikely for them to change significantly in 2005.

FSA spokesman Robin Gordon Walker says: “It would be ludicrous for KFIs to be torn apart. It will not happen.”

Mortgage Brain chief executive officer Mark Lofthouse says: “I firmly believe that in 2005 and beyond, sourcing systems will continue to be the preferred means of generating compliant KFIs for introducers, especially as lender KFIs vary substantially whereas those from Mortgage Brain are consistent across all lenders. Introducers are relying on sourcing systems to generate their KFIs.”

Banco Santander has said it is committed to forging and creating strong relationships with intermediaries. In a letter to intermediaries at the end of November, Abbey chief executive officer Francisco Goméz Roldásaid: “We will preserve and strengthen Abbey as an independent force in the UK market.” Intermediaries have seen little else since.

The foreign invasion continues as National Australia Bank announced on November 29 that it intends to expand its presence in the UK mortgage intermediary market with mortgages branded under the Clydesdale Bank brand. US-based Countrywide Financial was known to be looking at breaking into the UK mortgage lending market but is believed to have suspended plans because of poor third-quarter earnings, down by 47 per cent. Countrywide could not comment further on its UK plans.

Whoever is in or out, it is certain that intermediaries can look forward to an exciting and hopefully profitable New Year.

With lenders having to focus so much of their attention on statutory regulation in 2004, innovation has taken a back seat both in terms of human brainpower and the availability of IT resource needed to support any new product developments. Thus there is some catching up to do this year. However, those lenders (you know who you are) whose KFIs need serious attention to reduce them to a reasonable number of pages will no doubt be concentrating on this first to avoid incurring further wrath from the FSA. I confidently expect to see some really innovative products and three market segments where we can expect to see significant action are products targeted at but not limited to first-time buyers, lifetime mortgages and offset mortgages.

There are now signs of a revival in FTB activity and this would be stimulated by a product which makes property more affordable and/or one that gives them additional confidence to buy that first property. An increase in income multiples and more lenders moving onto an affordability model has helped but something else is also needed.

A real fear of many potential FTBs is the risk of negative equity and being forced to sell their property at a loss because the mortgage has become unaffordable. I am aware of one very innovative mortgage product planned for launch in the first half of the year which brings a totally new slant to making a mortgage affordable on a long-term basis.

A trend I expect to see increase over the next few years, although only on a fairly limited basis in 2005, is an increase in shared ownership. This could appeal to those wanting to trade up as well as well as first-time buyers, if sufficiently competitive financing was available. Currently, many people perceive shared ownership as rather downmarket because of its connection with social housing. The challenge is to find cheaper ways of funding the equity share portion, which would broaden its appeal. One investment vehicle that should help to do this is the planned new property investment funds. It is a pity that the Chancellor’s love of delaying implementation of a good idea by having excessive consultations rather than doing something means the launch of Pifs has now been put back at least a year to April 2006.2004 saw relatively slow growth in the lifetime mortgage market but growth is likely to accelerate again in 2005. Several lenders are planning to enter this market and others are seriously considering it. In addition, some existing providers are likely to add new features to their products. The extra competition, plus long-term swap rates now lower than a year ago, may force rates down but will certainly mean some additional USPs.

My third category is offset mortgages and we will certainly see more lenders offering these, including a new entrant in January. There are currently only two lenders offering fixed-rate offsets and this is an obvious area where more competition would be welcome. However, for offsets to be good value for a significantly bigger proportion of borrowers, the margin above the rates on the most competitive other mortgages needs to narrow and more competition in this market should help achieve this.

In the buy-to-let market, there will be a steep learning curve for brokers authorised by the FSA and advising on buyto-let mortgages on the basis that they are totally unregulated. Despite being technically true, the FSA looks at all business written by regulated firms and any firms which have not yet taken this on board are likely to get a rude awakening. If the number of non compliant websites and financial promotions is any guide to how seriously some brokers are taking regulation, this may be a significant problem.

Ray Boulger is senior technical manager at Charcol

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