The financial crisis has made the mortgage industry more aware of risk. In just three years, we have seen average house prices drop by as much as 20 per cent (and then rise again by nearly 10 per cent), interest rates move by over 5 per cent and mortgage lending and intermediary numbers fall by over 60 per cent.
With continuing global economic instability and the comprehensive spending review cuts yet to bite, there are many risks to lending and borrowing. There is at least one thing that regulators, lenders and intermediaries can all agree on – risk mitigation is necessary.
According to the Council of Mortgage Lenders, if mortgage rates rose by two percentage points from their current level, about 2.9 million mortgage holders would have home-loans that breached the FSA’s new affordability guidelines. Historically, to avoid such exposure to interest rate risk, customers would simply remortgage to a fixed rate.
But the CML has calculated, in a survey conducted for it by Policis, entitled New Approaches to Mortgage Market Regulation 2010, that 2.2 million borrowers would not get a mortgage at all now, taking into account the FSA’s various proposals on affordability, income verification, repayment basis, maximum term, age and the 2 per cent stress test.
A significant percentage of lenders’ and intermediaries’ customers are therefore not currently – and maybe never will be – eligible for another mortgage.
They are most likely to be self-employed, older, buyto-let or interest-only borrowers adversely affected by changes in lending criteria since they took out their most recent mortgage.
In addition, many people do not have enough equity in their property to move. Lenders offer their best rates at 75 per cent LTV or below and there are almost no 90 per cent LTV deals available.
According to the CML, nearly half a million 90 per cent-plus LTV mortgages have been taken out since the start of 2007. Given that house prices are still well below their August 2007 peak, one can assume that many of these borrowers will still have less than 10 per cent equity and many other homeowners – who had more than 10 per cent equity when they took out a mortgage – have been dragged into this situation.
If these groups of customers want to fix or cap their mortgage to mitigate their interest rate risk but do not fit current lending criteria and so cannot remortgage, what can the financial services industry offer them?
Against such a background, one interesting proposition in the recent CML publication, Response by the Council of Mortgage Lenders to the Financial Service Authority’s Consultation Paper 10/16, is for lenders and inter-mediaries to use existing insurance products to help customers manage their risk.
Simple general insurance policies backed by the Financial Services Compensation Scheme and regulated by the FSA can protect against interest rate rises (just as with the familiar risks of unemployment, sickness and incapacity). Sold separately from the mortgage, these policies are portable between homes and lenders and offer the very flexibility that the FSA is searching for.
For the lender, the existence of such protection offers a significantly decreased risk of arrears and may allow lending where an affordability stress test would cause a case to fail. This could be a new solution to the problems posed by the exclusion of millions of borrowers from the remortgage market and may indeed be the only positive to emerge from the mortgage market review consultations.
Chris Taylor is chief executive of MarketGuard