Andrew Montlake, director, Coreco
Jonathan Clark, mortgage partner, Chadney Bulgin
Danny Lovey, principal, The Mortgage Practictioner
The Centre for Economic and Business Research recently predicted that the Bank of England bank rate would remain below 2 per cent for the next five years. How will mortgage products develop and the nature of the industry change in the coming years if low rates become the norm?
Montlake: It is all about innovation and it is down to lenders to work with brokers to address the need of the clients and I think you will see more work done with both parties on that. But will the bank rate stay that low for five years? Ask 10 economists and you will get 11 answers – rates might be up to 4 or 5 per cent in three years, you just don’t know. The mortgage market should be dealing with whatever the economy is, through innovation and looking at things in a different way.
Clark: It is likely that lenders will be increasing their tracker margins if rates do stay low for the next few years, so ultimately a low-rate environment will help the greedier banks cash in.
But it will also bring some stability to the housing market and anything that convinces people that rates will be flat for a few years will make them more happy to commit to a mortgage. However, a low- rate environment will also affect those banks with large amounts of their books on their standard variable rates – someone on a 2.5 per cent SVR is unlikely to remortgage. It might prompt some banks to offer existing clients better rates to reduce their SVR client base and that would help a lot of borrowers.
Lovey: I am more comfortable to say that things will remain low for the next two years rather than for five. If that is the case, it is going to ensure the remortgage market is virtually non-existent. It will also make sure the current situation remains – a low-rate environment means the big lenders can avoid all the people who they do not want to lend to and they do not have to try too hard with the customers that they do want.
The only good thing is that a low-rate environment may encourage some securitisation, which is quite bullish, but it is very hard to see anything change in the industry if rates stay low for a long time.
In its mortgage market review discussion paper last week, the FSA proposed a ban on any mortgages which do not need proof of income such as self-cert. How will this affect the market?
Montlake: Banning self-cert will cause quite a few people to be stranded but this feels as though this is a return to the way it used to be for advisers. In the past, it was all about getting access to the underwriters, building up a case for the client with all the documents we can find and actually working with that underwriter to demonstrate affordability.
I hope this forces lenders to have to be more innovative and to get some new self-cert style products together, using documents such as accountants’ certificates or bank statements, for example.
Clark: I think most people saw the self-cert ban coming. The FSA has been talking about it for a long time and I am surprised it has even taken this long to propose. Anything that cleans up the industry is a good thing, the problem is that there is a place for self-cert. Those who cannot prove their income will not have a lot of option, but lenders have got better and they are friendlier with contract employees and those who have been self-employed for two years.
Ultimately, advisers will have to be more prepared to provide evidence of income and will have to demand tax returns and bank statements from their clients.
But this decision will cause problems because those who took out self-cert a few years ago will be stuck with their lender now. That could be a lot of people, not just clients who could not prove their income. This will just adversely affect the remortgage market even more.
Lovey: With this proposal, the FSA is flying a kite, it is saying to the mortgage lenders that it does not like self-cert in its current form, so it wants the market to innovate and come up with something that is not self-cert but at the same time does not trap people in their homes who cannot prove their income. The gauntlet has been thrown down and it is a call for innovation.
But at the same time, the FSA has to remember that the public sector may have regular Government contracts but the real people in the real world are entrepreneurs who earn money how they can. You cannot say to all the entrepreneurs that they are locked out the mortgage industry all of a sudden. If we want to encourage business we simply cannot say that. There is a point of balance. Self-cert was abused and we want those bad practices out of the way but a sensible judgement on the sector has to be made.
Within the same paper, the FSA proposed changing the advice labels given to different professionals in the industry. Is it time to scrap “whole of market” mortgage advice? Will consumers be less confused between “independent” and “restricted” mortgage advice?
Montlake: I think there is a bit of confusion right now as to what whole of market actually means because it does not really mean what it says at the moment. If the FSA gets the definitions right, it could be a sensible move and it will clear up things for the consumer.
But at the same time, it could put off clients if you have to declare that you are a restricted adviser but then that is all down to what restricted means.
As long as people understand what restricted advice means, whether it means the adviser can offer 90 per cent of the mortgage market or just able to offer one lender’s product and as long as you spell it out the consumer, they should be savvy enough to come to their own conclusions.
Clark: We do not like this idea but the FSA are aware that most whole-of-market brokers are sitting clients in front of the computer and only showing them the lenders they can get hold of.
With the prominence of the likes of HSBC and the amount of dual-pricing going on, those clients are missing out a lot of deals.
We use a system that shows all the deals, including high- street loans, so to be whole of market like us you have to do that. If my client can get a better loan direct, I will tell them. Clients can go online themselves and see that they are not being offered everything that is out there anyway.
If you want to give proper advice you have to be whole of market. Too many advisers are calling themselves whole of market but they are not.
Lovey: At last. How many times have we said that independent means what it says in the dictionary to the man on the street, not described by the FSA? But what qualifies as independent and restricted has to be cleared up. If restricted means advice from a panel, that is fine, but if the FSA says restricted means someone in a bank offering one lender that’s not right.
Independent, meaning what the public understand it to be – as in offering the whole of the market who will deal with you – is fair enough as it is a good representation of the market.
But a bank should be called what it sells – single product. Really, you should not even call these people an adviser when they are a salesperson. They are advising one thing and people are getting very confused with what they are being offered.
Montlake: If the FSA wants to regulate the sector properly, then it will have to split it and ask when does a casual buy-to-let owner become a professional. But then the question is where do you put that split? Up to five properties or 10 properties?
Regardless, most of the bigger brokers have been treating buy-to-let as an essentially regulated sector anyway by offering KFIs and spelling out this, that and the other to the client so, in reality, regulating the sector across the board should not make much difference to how buy-to-let business is done.
Clark: I do not think the FSA will be able to split the buy- to-let market. It would be very difficult to do. What constitutes a personal buy-to-let investment and what is commercial? Is it down to how much you own or how many properties you have?
A lot of people were coaxed into newbuild buy-to-let deals a few years ago and, as a result, we have a lot of small landlords, so the sector has to be regulated. If buy-to-let had remained a niche, commercial enterprise, then it would have been fine not to regulate it but it is huge now, with many people owning one or two properties and they have to be protected.
Lovey: I believe buy-to-let should be regulated but I do not think buy-to-let should be regulated in the same way as residential mortgages. They are different things – one is a home, one is an investment – and while they both have to be regulated, that difference has to be recognised by the regulator.
It may well be that certain rules apply for one and not for the other so they should not be merged as one unit but it will not make a difference to most in the market as they treat buy-to-let deals as if they were regulated anyway.
The FSA says it will put the onus of mortgage affordability on lenders and experts have predicted that this puts the position of broker into question. Is this the case? Will this change of focus affect the intermediary/lender relationship? Will it favour a certain type of distribution model?
Montlake: I would hope that lenders just adopt a sensible approach to assessing affordability. All this tabloid furore surrounding having to admit how much you spend on cigarettes and alcohol as part of the affordability assessment is a bit much as brokers have been doing this for years in terms of their standard budget planner. It is on our budget planner. We ask how much they spend on everything.
I hope this ruling means the adviser makes that budget planner available to the lender and they can get a borrower confirmation, as that would be a simple way to do it. It should not be too complicated to enforce but the question is, will the lenders get nervous about it and begin imposing unnecessary sanctions?
Clark: Regardless of FSA rulings, the situation between lenders and intermediaries will stay much the same. Over the last few years, we have found that lenders are asking for a lot more information audited anyway. We have begun to get used them asking for more proof.
The relationship will not change either, as a good adviser should have all the documentation ready and on record. regardless of what the lender demands and new proposals of the FSA.
We make sure to put together a budget planner for all our cases, so hopefully all this rule will mean is that we make sure to submit that too. I do not understand how an adviser would not make their client put together a budget plan, so, for good advisers, nothing will change.
Lovey: Why should this proposal change anything? I am going to do what I have always done and that is calculate my clients’ affordability, not how much they can borrow. But I do not ask them about tobacco and alcohol expenditure as it is none of the adviser’s business. I ask them to detail their discretionary spending and that is all, however they spend that money is not my business. It is ridiculous and over the top to ask about tobacco and alcohol, it is nanny state stuff.
We just have to take their commitments into account, taking every precaution and I stress-test clients at up to 7 per cent to make them aware of any rate shocks but what they spend any extra money on is their business.