Life as a mortgage broker in testing times

In 13 years as a mortgage broker, I have witnessed more change in the industry in the past 5 years than ever before. That will be a surprise to no-one. What may be a surprise are two factors that affect the mortgage-broking industry and those who need our services. Firstly, the fact that lender criteria is shifting even now – and in many ways for the better. Overall, and whether for good or bad, the result of the ever changing criteria brings us to the next issue facing those needing mortgage broker services: Secondly, the fact that a huge number of brokers are leaving the industry (Both the good and the bad).

Make no mistake, while the press would have you believe there is no money to lend, the banks are looking to lend where there is a viable proposition. And understanding the mechanics of this shift to more traditional and careful lending creates opportunity for both the borrower and broker.

A short and simple example of this is a deal I have recently advised on. The client’s borrowing is structured on interest only and they would ideally like to remain on interest only, or at least that was the idea before we gave advice. The result of the recent changes with interest only lending means that they do not meet the requirements for interest only with most lenders. The solution to the problem was not to take a higher rate with a quirkier lender and stay on interest only, but to take a 39 year repayment mortgage at a much lower rate with a high street lender. The payments on this are much lower than they are paying for the current interest only deal and yet the loan will gradually reduce and cost over the whole term is significantly lower. Of course, the client will not keep the deal for a full 39 years but the benefits will roll into the next deal no matter how different the structure of the next deal might be. This is a two year solution which we will review and re-set according to market conditions – both those in the mortgage market and in my clients’ own business. The lesson to be learned is that there is more than one way to approach a mortgage. The current wave of successful mortgage brokers are deal makers as well as finance experts.

Sadly however, even some of the good mortgage brokers are choosing to leave the industry rather than keep up with the changes. Although the reduction in brokers is starting to level out, the numbers are still on the decline. In December 2010 30.8% of Appointed Representatives left the industry. December 2011 this amount reduced to 8.1% but is still an exodus nevertheless. Reports say that there are less than 1/4 of the mortgage broker companies left in the market then there were in 2007. This would be a good thing if it was only the dead wood that was leaving, but I have seen some of the good go too.

Life as a mortgage broker with a positive outlook and fresh approach to the challenges of the industry is in fact rather rosy. Every cloud has a silver lining. As a business, the vast majority of our clients contact us because of a referral from another delighted client. As a mortgage broker based in Cardiff and Poole, we are regularly advising clients from South Wales and the South of the UK – from London to Cornwall and up to South Wales and Gloucestershire. It is a wide area to cover, especially because we take a genuine interest in our clients and like to visit each one to give mortgage advice face-to-face. However, we are a team of mortgage brokers so it does not all fall on one person!

If you have any mortgage questions, no matter how tentative, please feel free to get in touch. Talk to Rachel Bowes or Howard Bowes on 029 2115 6918. You can also ping an email to theteam@harveybowes.co.uk

Think carefully before securing other debts against your home. Your home may be
repossessed if you do not keep up repayments on your mortgage

Does Interest Only lending have a place in the modern mortgage market?

Looking at the significant shift in criteria from lenders you would be forgiven for thinking the days of Interest Only lending are all but over. During a 3 week period starting mid Feb 2012 Abbeharvey bowes logoy/Santander started a wave of significant criteria changes closely followed by other lenders. They reduced the acceptable Loan to Value (LTV) for interest only lending from 75% to 50%. So if my statistics are a reflection of all brokers, and less than 25% of the interest only business we look to place is under 50% LTV, this is very restrictive indeed. Lloyds Banking Group (including Halifax) quickly followed taking away cash ISA’s as an acceptable repayment vehicle and making other restrictions where intended repayment is from pensions or stocks and shares. Initially Nationwide also reduced the loan to value to a maximum of 50% from 75%; and then in October 2012 announced that Interest Only borrowing would not be available to new borrowers at all. The Woolwich (Barclays mortgage arm) announced they no longer accept pensions as a repayment vehicle. Clydesdale, Leeds and others have also followed suit by issuing a variety of restrictions. Even the small and quirky Building Societies have responded harshly, take for example the Teachers Building Society who have made interest only lending criteria almost impossible to meet.

What has been the driver behind these weighty changes?

The FSA published a paper, under the ‘Mortgage Market Review’ initiative at the end of 2011. The pressure is on lenders to change the way they assess interest only applications. Although there has been more clarification on the requirements in October 2012, there remains some uncertainty with the lenders on how they will approach new requirements, which largely come into play from April 2014. There is, therefore, some time remaining to address criteria and amend policy moving forward. The changes increase the obligation on lenders to ensure that their mortgage borrowers have a suitable means to repay the mortgage. And let’s face it, this is not a bad move. What happens to a home-owner who is currently on an interest only mortgage which is coming to the end of term? How will that potentially large capital balance (mortgage amount borrowed) be repaid? Too many interest only borrowers do not have a suitable repayment vehicle and will rely on the sale of the property to repay the loan – however, if they do not have sufficient equity to down-size, this is a big risk. So too is the fact that in a slow market, the property may not sell in a reasonable time frame?

Another aspect of concern is the new guidelines on affordability. Some lenders are now considering the affordability of an interest only mortgage on the same basis as a repayment mortgage. In other words, a borrower has to prove they can afford the monthly payment on a repayment basis even if they borrow on interest only. This will prove restrictive for borrowers approaching the end of their mortgage term, particularly if they are also approaching retirement and are borrowing on interest only.

What does this mean for interest only borrowers?

Firstly, there are still some high street banks with good rates who have a flexible approach to interest only. But it is a question of ‘watching this space’. As there are more changes to come and lenders who currently have a more flexible approach to interest only at the current time, may need to address this in the not too distant future. Why is this? If only a small number of mortgage lenders have a more flexible approach to interest only than the majority, they are going to get more interest only applications – that stands to reason. In turn, their mortgage ledger will have an imbalanced risk profile, as they will have more interest only and not the right spread of borrowing profiles. This in turn will mean they too will have to withdraw, or at least restrict the interest only borrowing to bring the risk profile back into an acceptable zone.

There is, therefore, a distinct possibility that many home-owners may become ‘mortgage prisoners’. This is a term we use for those who are stuck with the current lender regardless. In other words trapped to the deal they have already in place, with the current lender; and potentially at the mercy of the lenders Standard Variable Rate. Although the base rate did not move yet again through 2011 and up to this point (October 2012) we have seen Halifax, Clydesdale, Bank of Ireland and many more increase their Standard Variable Rate. A highly notable increase was a full 50 base points from 4.24% to 4.74% by Abbey/Santander.

The most vulnerable are those nearer to their retirement date, perhaps even those with as much as 15 years to run or more. This is because these individuals would have to prove they could repay the loan in full over the term, where on repayment the monthly payments would be far higher due to shorter time to retirement or the lenders maximum acceptable age and as a result they fail affordability.  Another vulnerable sector are those who own businesses and intend the sale of the business (or business assets etc) to provide all or some of the funds to repay the loan at the end of the term.

But does interest only lending have a place in the mortgage market of the future? There is no doubt that it has changed already and interest only mortgages are now more difficult to obtain. This is not really a bad thing for the industry overall, nor for younger borrowers. However, as always it will catch some borrowers. Saying that, interest only does have a place in the market. It makes sense for business people who may sell their business or business assets to repay the loan at the end of the term, but want lower monthly payments on their borrowing now, particularly in these tough economic times. It might make sense for someone who has substantial equity and could realistically down-size at the end of the term and be happy to do so. Interest only will be around for some considerable time to come – but it will be more difficult to access.

What should you do if you have an Interest Only Mortgage?

Talk to us. The question is why you have an interest mortgage? And if the reasons are valid enough, can you get an interest only remortgage or purchase a new property with an interest only loan? Why not talk to one of the advisors at Harvey Bowes, we can give you straight talking jargon-free advice on your options. Call 029 2115 6918.

This blog contains information based on my personal opinion and is not presented as, or intended to be, taken as any form of financial or mortgage advice.

Think carefully before securing other debts against your home. Your home may be
repossessed if you do not keep up repayments on your mortgage

You can find our main website at www.harveybowes.com