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Feature Looming challenges discussed at the Mortgage Business Expo
The shock of the new
First-time buyers who fixed two years ago face the shock of rising mortgage payments, London’s Mortgage Business Expo was told, while new buyers will have to negotiate stricter, downward valuations. Simon Meadows reports
The energy crisis could be “a drop in the ocean” compared to the payment shock felt by borrowers, particularly first-time buyers, coming off a fixedrate term and facing spiraling costs, the Mortgage Business Expo has heard.
Rob Barnard, relationship director at specialist mortgage lender Pepper Money UK, told an audience at the London-based show that he worried about the impact on those newer to the property market.
“I really feel for those first-time buyers who went all in two years ago – life savings on a property, maybe had an LTI [loan-to-income] stretch of around four and a half times. They’re in for one heck of a shock.”
Hosting a panel of experts on a discussion of the challenges for firsttime buyers and existing borrowers in the current market, Barnard declared, “Personally, the energy crisis to me is a drop in the ocean as opposed to people who are coming off two-year fixed rates.”
In 2020, there were just over 300,000 first-time buyers. In 2021, that figure rose to a high of 409,000, boosted by stamp duty relief. So what options do first-time buyers have if their existing deal expires and they face a significant payment shock?
Seeking professional mortgage advice is key, said Ryan Davies, strategy director at Bluestone Mortgages, which provides complex credit mortgage solutions for people who don’t fit high-street banks’ traditional profiles. “Trying to navigate the market with its current volatility on your own, without the support of a financial adviser, is going to be incredibly challenging,” Davies suggested. “I hope customers are starting to speak to their financial advisers. The other thing I would recommend is absolutely start talking to your mortgage lender as soon as possible. People are going to have a lot of difficult decisions to make over the coming months – ‘Do I try to focus on making my mortgage payments, do I focus on putting food on the table, do I focus on heating my home?’ So there’s going to be some really challenging conversations out there.”
He continued, “In terms of payment shock and what people can do to avoid that, I was looking at the correlation between the Bank of England’s base rate and the number of interest-only mortgages. What’s clear is the higher the base rate, the more interest-only mortgages there are in circulation, and vice versa – the lower the base rate, the fewer interest-only mortgages there are. So I do think we are going to see over the coming months a big transition from current propositions with repayment mortgages, where people are looking to move to interest-only, maybe part-and-part options, to try to avoid that payment shock as much as they can, bring down their monthly payments, and ultimately get over lenders’ affordability hurdles, which are going to be a huge challenge.”
Dale Jannels, managing director of broker Impact Specialist Finance, acknowledged, “We are already seeing this payment-shock scenario. It’s going to get a lot worse before it gets a lot better. With everything right now we’re saying, don’t panic – have a look at the situation and what you can actually afford. Is there a chance that you can maybe look at the current lender
and go interest-only? Maybe there’s family who can help out as well. So it’s just a case of sitting down with the customer, having a good conversation with them, seeing what we can do, and we’re trying to explore all angles.”
SPEED IS KEY
In the face of changing market conditions and rapidly changing products, Barnard urged brokers to respond quickly. “I think one thing that you guys all should be focused on, and I know you are, and we are as lenders, and, I am sure, as distributors: If you’ve got an offer on the table with a customer at the moment, move heaven and earth to get it completed within the expiry frame,” he stressed. “That’s a really key thing. When you’ve got an offer that needs extending, that’s when different rates may be coming to the table, which is a challenge.”
Jannels agreed that it was important for brokers to act fast. “Speed is of the essence across the whole market,” he concurred. “What we’re seeing currently is that every client who’s coming through the door, whether it be a client directly or a broker coming to us, is asking, ‘What do we recommend for this client, what would you do if you were in my position, what’s the best thing?’ No-one, unfortunately, has got a crystal ball. We don’t know what’s going to happen. We’re all in this malaise of what’s going to happen next, and how long is it going to take?
“So a lot of people, at the moment, have taken trackers, a lot of people are sitting on variable rates just to see what happens. We’re all spinning a lot of plates; we’re all trying to keep clients happy. We’re all trying to help clients buy those houses. But right now, we’re doing probably more variable and tracker rates than we’ve ever done over the last five, six years, I would say, because clients just don’t know what’s going to happen.”
He advised keeping a close eye on arrangement fees, which had risen. “Watch the arrangement fees currently,” Jannels emphasised. “Where lenders were charging reasonable arrangement fees to do certain deals, especially on the
Dale Jannels
buy-to-let side, now we’re looking at three to five per cent as a kicker on the back. So just watch the whole cost of this to the client.”
According to Barclays, first-time buyers paid an average property price of £281,900 in 2021, down from £294,500 in 2020 – but 13 per cent higher than the average pre-pandemic price. Most started saving for their first property at the age of 24, but the average age at completion was 32. Almost three-quarters (73 per cent) wished they’d started saving sooner, and 64 per cent worried they would never be able to get on the property ladder. More than half (56 per cent) were reliant on family support.
Current first-time buyers may understandably be worried about whether they will still fulfil the lending criteria if rates change once an offer has been made.
“I think a lot of it just comes down to lender appetite,” offered Davies. “Some lenders will be happy to just let it go through. Others will want to reassess. A lot of it, as well, comes down to how lenders are funded. Some could be funded at the application stage, which means that they lock in a rate at application; other lenders can be funded at completion, which means that there’s a gap where they think things could change when they reassess. So generally, it’s down to what lenders think and how they want to treat customers through that process.
“It’s incredibly challenging at the moment – being able to manage that, being able to give brokers confidence that the prices that are in the market are going to be available for a certain period of time and are going to give people time to get their applications in. I think speed is critical, to give the lender the best chance of getting that case through securely.”
Customer perception was key for new buyers, added Davies. “The challenge we’ve got in the variable rate space at the moment,” he explained, is that “customers are looking at that headline rate thinking, ‘Well, that sounds like a great deal to me compared to a fixed rate.’ Yes, it might look cheaper, but rates are only going to go one way. I think it’s important when you’re looking at variable rates to look at what the fixed rate is today versus what the variable rate could be in six months’ time and try not to get drawn into that headline rate, which may suggest today it could be significantly cheaper. When looking at variable rates, it’s good to look at the longer-term picture.”
Ryan Davies
STRICTER VALUATIONS
Jannels said he was starting to see the lower valuations that have been widely predicted. “Every client who wants to sell their property has got their own valuation in mind, which is not necessarily the true valuation of that property,” he said. “But because demand obviously has outweighed supply recently, you’re going to pay what you want for that property. It doesn’t necessarily mean the valuer is going to agree that’s actually what it’s worth. I think now, over the next three to six months, we’re going to see a lot more down valuations occur pretty quickly.
“We saw one this week, where it’s a new-build property that has been down valued by a valuer compared to three months ago. The same guy went out and valued the property, absolutely fine, and it’s already come in 10 per cent lower than what the developers actually want for it. Those are the sorts of things I think we’ll see now where a bit more reality comes back into it. The valuers are going to stand behind the API insurance; they are going to get really, really strict on what prices they’re putting on these properties. It’s going to take a little bit longer; they’re going to do more research. Those are the sorts of things that we saw in 2008 to 2009. We’re going see it again now for the next year or so.” He told the audience at Mortgage Business Expo that he has never seen valuation challenges upheld.
Melanie Spencer, head of payment and mortgage services at finova, envisaged more borrowers exploring debt consolidation. “We’re starting to see those early sort of credit blips, where, you know, people are just starting to miss the odd payment, where they’re starting to feel the pinch, where they are starting to think, ‘Actually, I need to sort this now,’” she shared. “So we are seeing an uplift in debt consolidation, where they’re looking to consolidate into more manageable monthly payments. So they’re trying to take control. And therefore, they are looking at what options they’ve got. What I would say about the specialist market is lean on the specialist brokers within that space, who will be able to help you navigate the lenders and the products.”
Barnard said he believed that second charges, also known as secured loans or second mortgages, could become more common. “I think [that is so] especially if you’ve got somebody now who is on a very, very skinny high-street fixed rate for five years, and they want to do some improvement works,” he said. Second-charge mortgages “are undersold, and I think they’ve got a massive part to play in the current market.”
Maeve Ward, commercial director of Central Trust, an independently owned first- and second-charge mortgage lender, agreed, and said it was her belief that second charges would come into their own. “It should always be considered alongside a remortgage in any capital-raising situation,” she commented, “sold in the right way through the specialist mortgage brokers who understand the lenders and their criteria and have access to products that perhaps those who are purely in the first-charge mainstream market wouldn’t necessarily get access to directly.” She added, “We have seen a massive uplift in three- and five-year fixed, we’ve seen a noticeable drop in two-year fixed, and I certainly haven’t seen, probably for the last two weeks, a variable being sold at all.”
Customers’ behaviour was changing, Spencer noted, and brokers needed to get closer to them. “You have all probably got CRMs,” she remarked. “But what about things like customer portals? What about having onboarding tools, where we could actually start interacting with customers a lot sooner? Customers are changing the way that they do business with lenders and yourselves because they actually want to be more hands-on and do a lot more research online. So we do find that by having these customer tools available, you can start engaging with your customers as a firm and speak to them directly. That is a big thing. It all comes down to that education piece and getting closer to the customer.
Maeve Ward
“Are you contacting them, actually reassuring them that you’re there to help? Is it right to do something with their current lender, or is it something that we can do alternatively? Do budget planners with these customers.
“So it’s just about giving those options. I think you’ve heard about what [financial journalist] Martin Lewis said – that mortgage brokers are worth their weight in gold. Totally true.” M I
