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Don’t myth out on the non-conforming market

There are widespread false perceptions about non-conforming borrowers.

When it comes to the non-conforming mortgage market, there are still many misconceptions about the typical borrower and how complex it can be to arrange a non-conforming mortgage.

Yet if the mortgage market slows down this year – as many people are predicting – then it is important that intermediaries understand the realities of this sector as it will become an even more important source of business for them than it is now.

On the whole, a non-conforming client is not too dissimilar to a mainstream client and, with the growing use of technology, non-conforming mortgages are now much simpler to arrange.

The non-conforming mortgage market has grown substantially and it is hard to imagine how the mortgage arena would function effectively without this important sector. It now accounts for over 5 per cent of all mortgage transactions and non-conforming mortgages perform not just an important social function but also help in bringing liquidity to the whole mortgage market.

Client profileWho makes up the non-conforming market? There are many myths shrouding this sector but these have been debunked in a recent piece of independent research entitled, Non-conforming Mortgages in the UK: A Consumer Perspective, which includes key independent analysis by Professor Kevin Keasey, director of the International Institute of Banking and Financial Services, Leeds University Business School.

First, non-conforming clients come from all walks of life. They span each of the socio-economic groups and nearly one in six (15 per cent) of non-conforming borrowers are in the higher social classes A and B. There is not even a heavy bias towards unskilled employment, as some may have expected.

What is particularly interesting is that the average income of the non-conforming borrower is shown to be higher than the national average. Having higher average incomes may surprise some readers but it is worth noting here that this could have something to do with the fact that, on average, the non-conforming borrower is older than the mainstream borrower, with nearly three-quarters in the 35-54 age bracket.

Managing financesA common misconception of why borrowers end up as non-conforming is they cannot manage their finances properly. This may be true for some but not so for the masses. The reasons why individuals fall into the non-conforming category are specific to their own circumstances.

What has become known as life-changing events such as illness, redundancy and divorce are the real drivers of this market. Again, this is probably indicative of this group being older, as younger people are more likely to bounce back quickly from redundancy and are less likely to be divorced.

The research reveals that non-conforming borrowers are up to three times more likely to have been divorced or separated than a mainstream borrower, suggesting that divorce is probably the biggest single contributor to individuals being classed as non-conforming.

For most non-conforming borrowers, falling into financial difficulties is a short-term blip due to their life-changing event. So why should these people be excluded from obtaining a mortgage? Non-conforming mortgages play a huge role in the market, giving these clients the ability to be part of the housing market. These products can improve borrowers’ credit rating and provide access to funds through mainstream lending at a later stage.

Market buoyancyIf you turn away a non-conforming client, not only have you lost a potential sale but if this is done on a wide scale it would also certainly have a negative impact on the market.

Non-conforming mortgages have a significant and important role to play in the UK housing market. Excluding potential borrowers who do not fit strict criteria can have a negative effect, particularly considering the perceived importance of owning a home in the UK.

What does this mean for you?Perhaps the biggest myth that the research may help to overcome is the perception that non-conforming customers are significantly more difficult to deal with than standard customers.

Yes, there are clients whom you are not aware fall into the non-conforming category until their application is rejected but the onset of greater technology in the marketplace is certainly helping intermediaries to ease this pain.

Many lenders offer automated decision-in-principle systems which help them but you can now go one stage further as there are systems out there through which you can obtain a decision that is binding, subject only to valuation.

Rather than wait days for a mortgage decision, it is now instant and you have the flexibility of trying for another product if the first decision is negative. This makes your life much simpler and gives you a great deal more certainty that the case will complete once you have had an accept decision. In a slowing market, that will prove crucial for all intermediaries.

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