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Lending in new territory

Last week was a good one for competition in the mortgage market with news two Indian lenders are moving into the UK.

The first is State Bank of India, which has begun lending again on buy-to-let mortgages after pulling out of new lending in September 2012. The second is Axis Bank, one of India’s largest banks, which is also considering a launch in the buy-to-let market.

Brokers have welcomed talk of new entrants but have warned would-be lenders to compete on criteria rather than price. 

The Buy to Let Business managing director Ying Tan cautioned that Axis Bank will be “entering a niche market within a new market” and therefore should ensure it talks to brokers and industry stakeholders about its plans.  

As for State Bank of India, brokers have been burned before. The bank previously pulled out of the market because mortgage rates were so keenly priced that it could not cope with the volume of applications.

John Charcol senior technical manager Ray Boulger says: “One would hope and expect that State Bank of India has learned from its previous mistakes. To make a mistake once is forgivable for lenders that are new to the market; to make it twice is not.”

Boulger says a cautious approach is crucial for a successful entrance to the UK mortgage market.

He says: “Obviously, the best way to step into a new marketplace is to dip your toe in. Lenders need to understand not just the industry they are working in but the market as well. That means speaking with existing players in that locality, exploring distribution channels and getting the lay of the land.

“State Bank of India previously wanted to be the best on rates in its particular market and we saw what happened: it got inundated with applications and had to shut down its operation. That is an example of the wrong approach.”

Brokers say the right approach is to find a gap in the market and target lending where there are not enough options for borrowers. 

The Financial Conduct Authority is reviewing three banking licence applications and is in talks with a further 19 prospective lenders. The regulator declined to comment on how many of these firms are seeking to offer mortgages.  

Moneyfacts.co.uk says the total number of mortgage lenders in the UK, including niche players, has increased from 72 at the end of 2013 to 80 at the end of April.

A spokeswoman says: “The number of mortgage lenders is on the rise, showing an ever-growing appetite for lending. Help to Buy and Funding for Lending will have no doubt fuelled the market to what it has become today. Now that the Mortgage Market Review is in force, it will be interesting to see whether product pricing will feel the effects of the anticipated slow-down in mortgage applications.”

London & Country associate director of communications David Hollingworth says new lenders can do better by identifying a particular need in the market.

He says: “The difficult part for lenders is finding exactly where they sit in that market and making sure there is a need for their offering.”

Niche criteria

Your Mortgage Decisions director Dominik Lipnicki agrees. He says: “When new players come to the market, if they have come out with niche criteria, that then pushes other lenders to review their propositions. 

“We are back to near enough the same amount of lenders we had pre-crisis and that can only be a good thing.”

Hollingworth says he would be surprised if new lenders tried to compete aggressively on rates, especially given the current state of the market.

He says: “Broker confidence will be boosted most heavily by seeing innovative criteria. Post-MMR, there will be some issues in terms of which borrower profile is supported by which lender. 

“Tackling that issue will be key to gaining market share so that is where anyone looking to enter the market will need to focus.”

Lipnicki adds: “We do not need new lenders with better rates, which are already at a historical low. Our biggest issue is placement.”

Expert view: Bernard Clarke

Bernard Clarke

The CML is a broad church, welcoming lenders of all types as long as they operate in the UK market.  We have already recruited four new members this year, including a private bank, an equity release specialist and a firm with a Middle East parent company – an illustration of the diversity of UK mortgage lenders. 

The main beneficiaries of a thriving and more diverse mortgage market are borrowers. Product choice is widening, rates are at a historic low and firms are more willing to lend at higher loan-to-value ratios.  The result is that lending is expected to grow by 15 per cent this year.  

After a long, difficult period, the market is recovering some of its more positive pre-crunch qualities – and customers are benefiting from greater competition.

Bernard Clark is spokesman for the Council of Mortgage Lenders 

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