Brokers say the UK’s biggest mortgage lenders have been caught off guard by smaller rivals which are relaxing lending criteria and winning market share as a result.
The big names are now fighting back by entering into parts of the market such as interest-only and high loan-to-value lending that were previously seen as too risky and off limits.
So, after almost 18 months of restricted lending under the Mortgage Market Review, is the tide finally beginning to turn on criteria?
Chadney Bulgin mortgage partner Jonathan Clark says smaller mutuals have been leading the charge when it comes to launching innovative deals.
He says: “The big lenders have lost out to the smaller building societies on the most competitive products on the market. They got caught with their trousers down by building societies that were moving much quicker.
“Competing on rates is all very well, but it’s the criteria where lenders are really starting to set themselves apart.”
Clark’s comments appear to be borne out by lending figures. Half-year results from Royal Bank of Scotland, Lloyds Banking Group and Santander show all three banks posted year-on-year lending declines, with RBS down 7.1 per cent, Santander down 7 per cent and Lloyds down a massive 19.1 per cent.
Meanwhile, over the same per-iod, Virgin Money saw year-on-year lending boosted by 44 per cent, Skipton was up 31 per cent, Coventry was up 25 per cent and Paragon saw an increase of 98 per cent.
At the time brokers attributed this to smaller lenders being more nimble in adapting their criteria, particularly in interest-only lending, and deals for the self-employed and older borrowers.
It seems bigger lenders are now looking to redress the balance. Over the last month we have seen Nationwide earmark £1bn for its first range of standard 95 per cent LTV deals, followed by Santander announcing plans for its own 95 per cent LTV range outside Help to Buy.
NatWest Intermediary Solutions has also re-entered the interest-only market for those with an “acceptable” repayment strategy at up to 75 per cent LTV.
Personal Touch Financial Services sales and marketing director David Carrington says: “What’s happening could be fairly described as a sea change.
“Previously, criteria has been very tight so we are starting to see a more pragmatic approach from the larger lenders. It’s a natural process post-MMR, with lenders starting to realise where their risk appetite really sits.
“The larger lenders are taking what were specialisms or niche markets and trying to make them mainstream. It’s very encouraging that the high-street lenders are offering customers more choice.”
But Trinity Financial products and communications manager Aaron Strutt points out while all the recent activity around criteria changes is positive, this does not necessarily mark a return to the more irresponsible lending that was prevalent in the past.
He says: “It’s almost as if some of the mortgages from the boom times are coming back, but in some cases the acceptance criteria can be tougher.
“The deals are out there, but generally they are going to be harder to qualify for than they used to be. Take NatWest, for example, they have come back into interest-only, but state that borrowers must earn at least £100,000 to qualify.
“The building societies have ten-ded to be a bit more flexible on their lending criteria, particularly for borrowers who have a bigger deposit. But you will still need to tick all their boxes.”
Survival of the fittest
But if larger lenders are starting to muscle in on more specialist areas of lending, where does this leave the smaller players?
Carrington believes the market is big enough for everyone as long as mutuals and specialists continue to carve out parts of the market for themselves.
He says: “Clearly smaller lenders can’t compete across the board on the same scale as the likes of Santander or Nationwide. But as long as they maintain a clear niche they are good at they will survive alongside the big boys.”
Yet Clark argues mutuals still have the competitive edge when it comes to criteria.
He says: “Smaller building societies are a bit leaner and quicker to move because they are not constrained by having to pay dividends to shareholders. I don’t see that changing.
“The building societies have done a really good job in adjusting their criteria, and some of the banks are going to have to chase pretty hard just to keep up with them.”