Should equity release be seen as a product of last resort by consumers?
Sadler: No. Price rises over the last 20 or so years – despite one severe downturn – have created an entire generation of equity-rich homeowners. Many are now opting to release some or part of their capital through equity-release schemes to improve the quality of their lives, particularly as they enter retirement. What is important is that the product matches their needs and circumstances. Lenders and intermediaries must ensure that product design and marketing is transparent, fair and responsible to empower the borrower to make an informed decision. Regulation may have a role to ensure this happens.
Aitken: If elderly people want to keep living in the same house and not trade down to release the cash tied up, then releasing money from the property can be an attractive solution to raise cash. However, such borrowers must understand that if you borrow large sums of money (no matter what the security is) and never make any repayments, the interest added to the principal each year and will make the debt rise exponentially.
The problem is that elderly parents – and their children – may “understand” this fact when they want to release the cash but believe they were “missold” the product when the whole value of the property has been overtaken by the accumulated debt. This is, unfortunately, human nature so equity-release lenders and brokers had better make sure that they have watertight documentation on the sort of advice they give to customers prior to the borrowing decision being taken. This is particularly relevant as the FSA will be putting a greater focus on equity release as it is considered a higher-risk product for consumers.
Mountney: Absolutely not. There are potentially higher risks with this product but at a time when pension income is historically poor and still under threat, with such value locked away in property and doing little to ease the income strain, it is a perfectly sound proposition for many.
Will David Miles' recommendations make any difference in the long term?
Sadler: These do not appear to be radical in their impact. The key recommendations centre on improving borrowers' understanding and improving the environment for mortgage funding. From the borrower's perspective, any measures enabling them to make informed choices would help lenders and intermediaries. The results may be fewer complaints and a more streamlined sales process. In terms of improving funding processes, improvements in the wholesale markets would improve efficiency, the benefits of which should be transferred to consumers.
Overall, it could be considered that, while not radical in concept, the recommendations should help in bringing about a more transparent and efficient lending marketplace. Implementation of the recommendations is an uncertainty and we await news from the FSA keenly.
Aitken: Miles' key proposals on clarity of information are in line with what is already taking place in preparation for regulation. The Miles report's argument is that consumers should be given better information about long-term fixes and, if properly informed, then a greater proportion of borrowers will be expected to choose long-term fixes. At present, too few borrowers are opting for this sort of product but, with more longer-term fixed products coming into the market, choice is already opening up.
Another Miles' proposal – that the back mortgage book should not subsidise the front book – is also sound thinking and fair to consumers and I have no issue with it.
Likewise, I support the idea that building societies should have wider funding options, as improved competition will benefit consumers, so long as the market remains a level playing field.
Mountney: Possibly but I believe that the strong influence of advisers and lenders on their clients is the driver behind the product availability. The market is not necessarily driven that significantly by the demands of our clients. I personally have seen no desire for super long fixed rates and even if they could be provided at marketable rates, I would doubt the potential for success.
Will regulation end up costing the industry more than the FSA originally estimated?
Sadler: Before implementing any new requirements, the FSA is bound by statute to conduct a cost-benefit analysis. In terms of ICOB and MCOB, the benefits to the industry were deemed to outweigh the costs.
However, implementation at micro level is more difficult to determine. An ethical business should be planning and implementing processes and procedures which meet both the letter and spirit of the regulations.
In preparing for the new regime costs to a business will inevitably rise. These costs could be either direct, such as employing a compliance officer, or indirect, through resources needing to be diverted from business as usual activities to preparations for regulation. Past regulatory experience has shown that initial frustrations are dissipated as new processes and procedures become part of good business practice.
Further, the benefits of better-informed customers lead to benefits for lenders and intermediaries. These benefits could typically be attributed to a reduction in complaints and increased customer loyalty.
Aitken: Everything always ends up costing more than estimated. So long as regulation succeeds in better protection for the consumer, then the exercise will have been worthwhile. If the FSA's original cost-benefit analysis turns out to have been an underestimate, we should remember that this cost is not just a one-off charge against the industry to consumer protection put in place.
Conforming with regulation has prompted many businesses to upgrade their structure, systems and technology and this will help them to become more profitable and successful in the long term. The streamlining of mortgage distribution channels and the development of more sophisticated (and accurate) sourcing systems can also be seen as a long-term benefit for lenders, brokers and consumers. Perhaps it is a little misleading to lump all the industry costs together without balancing them against these individual benefits.
Mountney: Not that I can see at the moment. In fact, the reductions to fees payable to the FSA and the recent availability of lower PI premiums seem to have affected the decision of many as to whether to brave it out by going direct as opposed to probably similar costs via the appointed rep route. It is very difficult to say now what the long-term cost will be.
Are you concerned that over 40 per cent of buy to let landlords have been in the market a year or less?
Sadler: The fact that buy to let continues to be attractive to investment buyers is no surprise at all. As part of a balanced portfolio, property can be a sensible choice for investors seeking income or long-term capital growth.
It is important, however, that investors research the market to ensure they are buying a suitable property in an area where rental demand is set to remain healthy. It is also necessary for investors to ensure they have adequate cash resource – or insurance cover – to protect against void periods. Critically, they must not borrow beyond their means. In our experience, new entrant landlords appear to be heeding this advice. This gives us reason to be optimistic.
Aitken: In a relatively new and growing market, it is not surprising that many buy-to-let landlords are new to the game. With a lack of social housing, and demand for housing outstripping supply, the private rental market is no doubt a healthy one overall, even if some individual landlords find they have made poor decisions and ultimately withdraw from the market.
We must remember that buy to let is a commercial property market and the landlords who borrow money to buy rental properties are doing so as an entrepreneurial project. If these business projects fail, well, so do many other entrepreneurial ventures in other market sectors. However, underlying this question is a rather more significant one “Is the rush of private investors in buy to let inflating the property market?” The proof of this will come if buy-to-let landlords start to disappear as rapidly as the market mushroomed, and the price of lower-end properties (typically smaller terraced property and flats) starts to drop. Bad news for landlords but good news for first-time buyers.
Mountney: Not at all. But I would be a little concerned if the number continues now at a time when returns are coming off. The buy-to-let market is fairly new in its present format and my own experience shows that investors who entered the fray some years ago have done well for themselves. But the trend will continue all the time that prices continue to rise offering sound returns in the long run. It is the long-term view that has to be the driver now, not a quick in and out.
What do you think of Kate Barker's recommendations?
Sadler: The only concern is that buy-to-let investors should not be chastised. After all, buy to let has had a significant role to play in maintaining the recent buoyancy of the mortgage market as average buyers delay making purchases. It will be interesting to see how the Government intends offering first-time buyers incentives to purchase, by removing stamp duty, for example?
Barker can be seen as a positive step towards improving supply and ensuring ownership is within the reach of the majority. Success in these endeavours could result in renewed vitality within the mortgage marketplace as increased demand would lead to increased competition and greater borrower choice. This would increase the borrower base for lenders and intermediaries and ensure the market's vibrancy.
Aitken: The Barker review was all about housing supply, with the implications of the UK housing shortage for society in general at the forefront rather than the mortgage lending market. The recommendations of the review focused on building more homes. This would mean better regional planning strategies, and more responsive land allocation for housing.
If all this helps to unlock the logjam at the first-time buyer end of the market, this has got to be beneficial to all parties, with more business flowing through lenders and introducers. A gradual increase in housing stock is essential, as a sudden drop in house prices brought about by sharply increased supply could be damaging in terms of a return to negative equity.
Mountney: There is little in the Barker report that was not obvious. We have a fundamental problem of a housing shortage which has been so for years and is not likely to go away because it will take some bold political decisions to address matters. I have little confidence in politicians from any party taking such decisions that may threaten their own Parliamentary seat if they get it wrong.
Will there be an acute shortage of competitive mortgage products around after M-Day as lenders struggle to get their systems in place?
Sadler: Highly unlikely. It is our view that lenders – whether specialists or mainstream – have embraced the regulatory process early on and are well prepared for M-Day. This in no way underestimates the amount of work still to be done but I see it having little or no effect on the superb range of mortgage options now available to borrowers. Nor do I see the appetite for fresh and competitive products diminishing. This alone will drive lenders to continue to review and renew their offerings.
Aitken: No. If any lender is still struggling to get systems in place after October 31 then they will have a lot more to worry about than failing to get competitive products to market. On the contrary, the requirement to have comparative product information on tap for customers is likely to raise awareness of the more competitive products and stimulate demand rather than an acute shortage occurring.
The process towards the final stage of statutory regulation has been reasonably well timed, with everyone being given enough time to review their business model and get effective systems in place.
Mountney: I understand that the short-term attention might well be to get their houses in order but logic would suggest that their resources would have allowed for sufficient forward planning to achieve both – systems that work and a strong presence in the market. After all, advisers vote with their feet when lenders lose the plot and they simply cannot afford that.
Jonathan Sadler, director of sales and marketing, iGroup
Mark Mountney, managing director, Premier Mortgage Management Stuart Aitken, director of credit, Southern Pacific Mortgages Limited