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Boxing clever

Innovation and creativity are not two words that have been associated much with the mortgage industry in the past 18 months. The introduction of mortgage regulation managed to slow down innovation as lenders concentrated on getting to grips with the new regime and ensuring that their systems could cope.

Now that regulation has bedded in and things are running relatively smoothly, there are welcome signs that innovation is back on the agenda. Several lenders are in top-secret discussions with brokers regarding products that will introduce something radically different to the market. Whether it is a mortgage based on the lender’s standard variable rate with cashback paid into a managed equity fund – as opposed to paying it direct to the borrower – or mortgages linked to the retail price index, there are encouraging signs that lenders are thinking out of the box.

As with any decision affecting business, it comes down to the bottom line. Short-term fixed rates have been on the increase in recent weeks as a result of higher swap rates but lenders whose products sit at the top of the best-buy tables are still struggling to make a profit. Most lenders have resorted to the unpopular move of raising fees in a desperate attempt to increase profits. By introducing higher exit fees, they may also hope to deter borrowers from switching.

Creative thinking from lenders regarding new products that will make them money is therefore to be welcomed. The move away from run-of-the-mill products towards more innovative deals is also good for borrowers as more choice can never be a bad thing.

Innovation is key in terms of encouraging first-time buyers on to the property ladder. They used to account for just over half of total new advances but the figure is now down to less than 30 per cent as they struggle with low incomes and high property prices. New products have been introduced to address these issues, with slightly higher interest rates in return for no fees. Pooling of family savings and easier use of guarantors have also made life easier.

Flexibility is also increasing as demand grows for products such as offset deals, which now come with competitive fixed rates as well as the more usual variable rates.

While the residential mortgage market has slowed on the innovation front in recent months, the unregulated buy-to-let market continues to forge ahead. Lenders have reduced rental calculations and increased LTVs, making for more flexible and user-friendly products.

Rates have fallen considerably on BTL loans, particularly five-year fixes which dropped below 5 per cent earlier this year, made possible by the advent of the higher arrangement fee. The BTL market continues to thrive and, with more lenders set to enter it this year, they will need to get more creative to compete.

The challenge for brokers is that sophisticated clients often demand creative thinking. They want a mix of fixed and variable rates, high LTVs, foreign currency mortgages on their UK residence, the ability to overpay and underpay, as well as the flexibility to clear their mortgage years ahead of term with a big City bonus or two. It is our job to persuade lenders to give us what clients want.

Lenders continue to chat to intermediaries about product development, which makes sense, given the regular contact we have with clients. We should know their likes and dislikes by now. Creativity remains a challenge for lenders, however. Balancing what the customer wants with a product that is not too complex or off-putting can be tricky. At the very least, lenders owe it to their customers – and their shareholders and members – to try.


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