What do you think of the prediction that the UK could follow Japanese mortgage trends by moving towards longer mortgage terms of up to 50 years to improve affordability?
Underhill: Unlikely, although this largely depends on the future direction for house prices. We have seen in the past periods where the growth in house prices has outstripped earnings' growth, only for the longer-term relationship to be restored. Hopefully, this will happen again, since the thought of such long-term mortgage debt coupled with issues like pension provision is not very palatable.
Mowbray: Mortgage terms exceeding 25 years are not new in the UK but lenders have had little demand in this area because they clearly cost more. Extending the mortgage term by five years adds a further £18,788 to the total cost of a conventional £100,000 mortgage at a variable rate of 5.2 per cent. Opt for 50 years and the total cost rises by an astonishing £102,083.
This has become an issue because of the imbalance in supply and demand, especially in London and the South-east of England where demand far outweighs the supply of properties. This has caused prices to go through the roof, making it very difficult for first-time buyers to get on to the property ladder – this is the issue that needs to be addressed. Until it is, 50-year interest-only mortgages will be one solution to the problem. All-in-one accounts are already available for such terms, with the proviso that the debt should be cleared by retirement.
Smith: Affordability is currently assessed on whether income multiples exceed the sum borrowed. From the lender's point of view, affordability is not directly related to the size of the monthly repayment or the length of the repayment term. If repayment terms are as long as 50 years, individuals must be made aware that they will end up paying much more in total – assuming that they do not switch to a shorter term at some point (which is the most likely trend).
If borrowers demand such lengthy repayment terms, in a climate of increasing consumer tolerance towards servicing large debt burdens, then lenders will naturally look at devising suitable products.
Do you agree with recent predictions that the buy-to-let market is close to collapse, especially in London?
Underhill: Given the rush by so many people into buy-to-let, it was inevitable that rental yields would fall. The long-term returns provided by property investment in the past suggests, however, that collapse is far too strong a word.
Mowbray: The buy-to-let market has historically had a good arrears' profile. However, problems could arise for landlords who have no tenants for long periods. They will run into difficulties trying to cover their mortgage payments. Having said that, if house prices continue upwards, it will continue to price first-time buyers out of the market and renting will be their only option.
The only thing that will cause this particular bubble to burst is an unexpected and drastic drop in residential property prices. I do not think lenders should be reaching for the panic button just yet.
Smith: It is true that yields are reported to be at their lowest in London but it remains a popular area for investment because people believe that prices will always rise fastest there. However, caution should be exercised as it is always the overpriced properties that suffer the greatest loss in value when the market drops. We are experiencing a distinct drift northwards in buy-to-let activity, with investors perhaps taking advantage of the still-reasonable property prices and hoping for the price boom to follow them.
Do you agree with the FSA's warning in its Financing the Future report published last month that consumers do not understand the risks and complexities of equity-release products?
Underhill: Partly, yes, although this is not necessarily due to the lack of quality advice. The sales process demonstrates how cautious people are to enter into such arrangements. Combined with the long-term nature of the arrangement, this means that some people (and their families) may at a later stage become confused as to the full implications. Clear, simple, transparent advice is essential in this area but full understanding throughout can be difficult to achieve.
Mowbray: Equity-release products are complex and it is essential that people understand their implications. If the FSA's research has shown that there is a lack of understanding then it is an issue that IFAs can help address when dealing with these products to meet the needs of their clients.
Smith: It is widely accepted that the demand for equity-release mortgages is about to rise steeply, as current generations of workers are failing to make provision for an adequate retirement income. The assumption is that they will be looking to borrow against their biggest asset to provide more income in their old age.
The CML rekindled the equity-release debate last November, when it called for co-ordinated effort to develop well regulated and standard equity-release products for a market that it estimates to be worth around £400bn. Facing a market with such huge potential, I am sure that the regulator, lenders and consumer groups will work together to surmount the technical difficulties. An important part of this work will have to be an awareness and education campaign for consumers.
Do you think there is mileage in the call from the Royal Institute of Chartered Surveyors to make greater use of the tax system (for example, levying council tax on empty and second homes) to control volatile house prices rather than relying on interest rates?
Underhill: Possibly, although we are at a phase in the housing market cycle that we have seen before – house prices have risen to the extent that first-time buyers are being priced out of the market. This, together with a number of other factors – in particular, house price versus earnings growth and a rise in interest rates – should bring about a correction in the market.
Mowbray: The reliance on interest rates alone to control house prices is arguably not enough. With investors piling into the buy-to-let market and picking up second homes, it could be time to take a serious look at other measures to maintain a healthy, affordable housing market in the UK. Levying council tax on second homes could be one such measure.
Smith: Would council tax deter those with sufficient wealth to buy a second home from doing so? I would argue that it would not – especially as they already have to pay 50 per cent or more of the normal council tax. With regard to empty properties , I think it is safe to say that they are not part of the property boom and, in any case, after the first six months they are subject to the same 50 per cent-plus council tax as second homes.
The second-home market is a relatively small part of the overall picture, so if full council tax were levied on second homes I cannot see that this would have any significant effect. It is true that property prices are rising in traditional “second-home” regions such as East Anglia and the West Country but I believe this is more to do with improved road and air travel facilities – and no one would like to see those improvements reversed.
How would you counter brokers' assertions that lenders cannot cope with the continuing mortgage boom and the resultant levels of business?
Underhill: Partly, this is down to a level of growth in mortgage business beyond all expectations – gross advances grew from £120bn in 2000 to £160bn in 2001. The signs so far are that the 2001 figure will be exceeded in 2002. This has occurred at the same time as two other features – a consolidation of the number of lenders in the market and the growth in remortgage activity.
For the latter, the popularity of the “rate of the day” means the peaks in applications that lenders experience are far higher than they were. Long-term investment in systems and processes to remove as much manual processing as possible is the answer.
Mowbray: At the Virgin One account, it does not matter whether we are dealing with customers directly or through intermediaries, great service is of paramount importance to us. However, it is clear that many lenders have got this aspect very wrong, with some taking six to seven weeks to process mortgage applications.
Not all lenders get service wrong, as was found by a recent survey from Mortgage Force. This showed Virgin One and Northern Rock were top for consistent levels of service and trust.
The important thing for brokers is to get the balance right between a great deal for their client and making sure the lender's service standards do not keep the customer waiting for the mortgage.
Smith: I think it is true to say that some lenders are coping better than others. Getting service levels right when applications rise is often tricky but lenders can temper demand to a certain extend by holding back on offering highly competitive products.
Speed of application turnround is becoming much more important to borrowers, so naturally brokers are eager to be able to offer high service levels to customers and will be placing applications where service is good. In a time of high demand such as now, lenders will be pulling out the stops to maintain service their levels and safeguard future business.
Do you think Misys will have problems recruiting lenders to its premier panel because of the annual fee they will have to pay – which some in the market claim is as high as £30,000?
Underhill: Yes. It is a high price to pay for assistance with marketing and promotion of products and I imagine many lenders will not be in a position to sign up for this.
Mowbray: Because Misys is the biggest network in the UK, it will have no problems recruiting to its premier panel. As long as it delivers value to the lender I am sure it will work well both ways.
Smith: Networks such as Misys provide lenders with a valuable distribution channel. With depolarisation on the cards this potential could well be enhanced. There is nothing new in lenders and networks working for mutual benefit but a steep annual fee is another matter. If the networks get too greedy, lenders will consider alternative strategies to protect ever-decreasing margins.
Mark Underhill, product development manager, Yorkshire BS
Eddie Smith, director of business development, Verso
Scott Mowbray,marketing manager, Virgin One