15 minute read
Specialist Finance Introducer Development finance, equity release, and more from the specialist market
Cooperation among all parties is needed during testing times
Over the past few years, the market has seen the rise of specialist non-bank lenders, many of whom are leveraging the power of technology to bring agility and efficiency into the lending process.
“I have sat at both altars and completely appreciate the scope of the services provided by banks and non-bank lenders, and see how they each serve, some better than others, the niche market,” said David Alcock (pictured), managing director at Blend.
Alcock explained that specialist non-bank lenders like Blend who are focused purely on residential development finance were born with the objective of providing greater support to the housebuilding sector, with more gearing and higher loan-to-values (LTVs) than traditional or challenger banks could ever offer.
“So, it is a very specialist product, or rather relationship, designed with housebuilders who need their money to go farther in mind – specifically, those smaller SMEs,” he said.
Generally, however, Alcock said that rather than seeing them as competing, he strongly believes in cooperation among all the participants in the lending ecosystem, particularly between banks and non-bank lenders.
Alcock said that the non-bank lending market in the UK is hugely fragmented, and customers often complain about the lack of regulation and accountability in the market.
As such, he believes the market needs experienced property people, delivering transparent processes that put the developer first.
“The business has been living up to that mission for five years, serving as a trusted lender to experienced property developers looking for higher gearing than traditional or challenger
David Alcock
lenders may be able to offer,” Alcock said.
The property market is shifting, prices are slowing down, and demand continues to soften. Alcock said that with the hindsight of a career spanning over 20 years across all segments of the property market, his one piece of advice to housebuilders is to pick their lender wisely because they can make or break a deal.
When it comes to development finance specifically, he said a buyer is not shopping for a rate – they are shopping for a lender who provides them with the support, experience, and flexibility they need to bring a project to life.
“That means a lot in property development
because, during my entire property career, I have rarely seen a project go 100 per cent according to plan, in terms of either timeline or circumstances,” he said.
Alcock elaborated that most property projects he has seen have faced unforeseen circumstances in one way or another to varying degrees, and he said that when this happens, housebuilders really need to be working with a lender who can find a solution instead of one who hits the panic button, causing unnecessary stress and anxiety.
He said that the current fast-changing market environment and hiking rates makes this even more important.
Therefore, housebuilders, he said, need a lender who understands the property development process, who appreciates that things can be delayed, and who is flexible enough to adapt to their circumstances.
Alcock explained that securing funding can be a complex and arduous process for many developers, so seeing them succeed and being part of that process – hopefully again and again – is the end goal.
He believes that a strong technological edge can put a specialist non-bank lender above the competition.
“For decades, innovation was considered a dirty word in housebuilding, a sector that was referred to by economists as ‘the backwards industry’ due to its reluctance to embrace technological innovation,” Alcock said.
However, Alcock noted that things have been changing of late, and it is specialist non-bank lenders – nimble, agile, and more flexible – who have been leading this change, powered by technological innovation.
“I am excited to see how specialist nonbank lenders are leading the way in supporting both long-standing SME house builders and a new generation of younger, digitally savvy, and socially engaged property developers eager to leverage innovation to help improve how we build, live, invest and sustain,” he said. MI
Are people increasingly drawing on property wealth?
Refinancing, consolidating debts, or extending a mortgage are among the considerations
Property wealth is usually an individual’s greatest source of savings, although it is not always looked upon as an option to boost cash reserves. However, with the cost-of-living crisis heating up, many homeowners are beginning to consider alternative approaches to giving their finances a lift.
While property price increases have recently faltered slightly, average house prices in the UK still rose by 7.8 per cent over the year to June 2022, according to the latest HM Land Registry (HMLR) house price index.
Simon Gray (pictured), managing director of HUB Financial Solutions, believes that many homeowners in the UK will be delighted to see that their investment in a home has returned them a really substantial storage tank of wealth that they can draw on in challenging economic times.
“They may have made significant financial sacrifices to get on the property ladder and pay off the mortgage, but that decision and perseverance are now paying them back,” he added.
Gray went on to say that the cost-ofliving crisis is having an impact on the way many people in the country are approaching their finances. He noted that people are re-evaluating how their income will cope with the large spike in energy bills, the increasing price of food, and other daily living costs.
As such, Gray explained that equity release is an increasingly important component of the retirement income market, and he said he has seen some changes in the reasons why customers are exploring this option.
According to Gray, every month, HUB Financial Solutions’ professional
Simon Gray
and regulated advisers meet with hundreds of people who are considering equity release.
“The cost-of-living crisis crops up increasingly as one of the reasons customers are considering equity release, but it has yet to become the single [most important] reason people enquire,” he said. Gray stated that, alongside more typical goals like home improvements or gifts, HUB Financial Solutions has seen people keen to shore up their finances, or those of their family, in readiness for future challenges.
“Some customers use a portion of the proceeds of a lifetime mortgage to consolidate debt or clear unsecured debt commitments to help reduce monthly payments, which in turn gives them a little financial headroom ahead of the anticipated surge in energy bills,” Gray added.
In addition to the primary lending need, he explained that some customers with restricted income, who would find it difficult to cover a sharp and sudden increase in their living costs, are trying to get ahead of this problem by setting up a modest contingency fund.
Other customers, Gray said, may be in a more secure financial situation themselves but have family members – particularly those who may be running a business or are self-employed – who are more stretched financially.
“For these people, the option to use equity release as a means of giving money to their family members when they really need it is a serious consideration,” he said.
While equity release may provide a good solution for many customers, Gray outlined that it is very important to remember the government support that is available, too.
As part of the fact-find process, Gray said HUB Financial Solutions’ regulated advisers check all customers’ benefits position to make sure they are not missing out on any state support to which they may be entitled. He noted that this often identifies income that people had no idea they should be receiving.
“In 2021, half of pensioner homeowners entitled to benefits were not claiming anything and losing out on £1,197 on average each year. Another two in 10 were claiming less than the full amount they could, with an average loss of income of £1,220 per year,” Gray added.
He explained that the government has announced additional support targeted at the lowest-income households, with almost all of the eight million most vulnerable households receiving a one-off £650 cost-of-living payment.
Gray concluded by saying, “It is important that anyone considering equity release also look at what state support they might be eligible to receive.” MI
Personal indemnity today
Stuart Wilson
CEO, Air Group
There are certain non-negotiables when it comes to running an advice firm, and perhaps top of that list is access to professional indemnity (PI) insurance.
The pool of available PI cover has been shrinking for some time, and that continues to cause serious issues, particularly for advisers active in the later-life lending space and particularly for smaller firms that may conduct only a small (but growing) number of cases each year.
That said, it is a predicament for many businesses, and as many reach their yearly renewals, that smaller pool of available cover is going to be drawn into sharp light.
I’ll give you a quick example of what firms are currently dealing with. One business owner we know very well came to us recently in something of a mild panic. Theirs is a very profitable advice practice active in the later-life space – last year their turnover increased by 77 per cent, and while I appreciate that “Turnover is vanity, profit is sanity,” they also turned a very healthy profit based on increased activity and income generation.
They had recently received the terms of their PI renewal from their existing insurer, and the numbers were mind-blowing. A 600 per cent increase in their renewal premium accompanied by a tenfold increase in the excess they would be required to pay, plus the addition of a range of exclusions.
This was concerning, to say the least – but it is far from being an outlier. It is a renewal offer that is being seen by many firms as they seek to secure ongoing cover.
There are many reasons for this, of course, not least the fact that many insurers have left the sector entirely. In that sense, the days of ‘bargain bucket’ PI cover offers are now consigned to history. There is a smaller number of insurers willing to be active in this space, and increasingly the cover they will offer is far stricter and more restrained than before – hence the huge increases in some renewal premiums on offer to firms like the one mentioned above.
This, of course, is problematic for any number of reasons. The firm mentioned is a specialist in the later-life sector and conducts a significant amount of business each year, but much of the growth in our market is currently being driven by firms conducting a small number of cases each year.
When I say small, I mean those who carried out perhaps two cases a few years back but are now up to a dozen. Next year – if permitted – they will do more. And this is not just a handful of firms, but many that are sensing the growing demand and moving to meet it.
However, securing PI cover is undoubtedly going to be more of an issue for these firms that it has been in the recent past. Look at it from the insurer’s side: covering that one firm that currently conducts a dozen cases would probably bring in a few hundred pounds of premium; however, should that firm get a complaint that goes against it, it could require up to £50k to cover the settlement. The numbers simply do not work on that basis.
The maths of this predicament have, as mentioned, resulted in a number of insurers pulling out of the market over the last year, which is why we have the renewals cited. And when those renewal figures do hit the mats of those businesses, they could lead them to decide that – for the number of cases they currently conduct – it’s simply not worth the premium outlay they must shell out.
That’s something we don’t want to see, because with these smaller firms driving a lot of the growth in our sector, and with demand growing for a whole variety of reasons, we need consumers to have more access to professional advice, not less.
In a way, we are something of a victim of our own success here – the PI rates are going up because the risk of liability is going up – because the market is growing. However, PI cover is a non-negotiable, and we need to find solutions for this issue. We also do not want to see firms opting for PI cover that is not worth the paper it is written on.
A word of warning here around renewals and shopping around. Be acutely aware of cover available from insurers that seems too good to be true. Remember that if you have a PI policy with an insurer that goes bust, there is no cover for customers under the Financial Services Compensation Scheme. Also, some insurers have no Standard & Poor’s rating at all, and that should be a red flag. Ask the question, and if there is no rating, then walk away.
There is also positive news here, however. The later-life industry, including Air, has been working closely with insurers such as UK Global that understand the needs of later-life advice firms and are willing to work with them. For the firm mentioned above, we were able to secure it cover at a premium half that of their renewal offer via UK Global, and that did not include the excess or the exclusions.
Yes, the firm had to pay more than last year, but there is no such thing as cheap cover anymore, and what we are trying to do here is secure quality insurance from reputable insurers, which allows firms to continue providing advice and growing their businesses.
It is not an easy road to walk, and it does require 52-week-a-year engagement with the insurer to secure PI and to help them understand what you do and where their risks are. However, I know from those still active in this market that PI insurers do want to work with you – but you will need to increase your level of engagement with them in order to make that journey less painful for all parties. MI
Snapshot of the BTL landscape
Cat Armstrong
mortgage club director, Dynamo for Intermediaries
Changes continue apace across the buy-to-let market, as lenders look to control their risk exposure and protect the demands being placed on their ability to service the needs of new and existing borrowers. This is a factor fully evident in the actions of some lenders that have taken the tough decision to temporarily close their doors to new business, and from many more that have pulled products and tweaked criteria over the summer months.
THE VOLUME OF BTL CRITERIA CHANGES
Focusing on criteria, recent data from Knowledge Bank suggested that the BTL sector accounted for 40 per cent of all criteria changes in its system in July. In second place was the residential sector with 30 per cent of July’s 1,500 criteria updates, followed by bridging with 23 per cent.
The most searched-for BTL criteria was, once again, lending to limited companies. This should come as no surprise, given the wave of activity experienced in this particular lending space over the course of the past few years. This also reflects the growing trend of professional portfolio landlords dominating the current BTL marketplace and the dwindling number of ‘amateur’ landlords withdrawing from the sector on the back of tax and legislative changes.
THE RISE OF THE PROFESSIONAL LANDLORD AND THE PORTFOLIO INVESTMENT
The rise of the professional portfolio landlord is an interesting one. Some landlords may start their journey more accidentally, but come to appreciate the potential of the BTL sector. Others may enter this arena with a more structured and scalable plan. And then there are some who acquire whole portfolios in one fell swoop.
This type of portfolio investment was the focal point of research from Octane Capital that highlighted that experienced property investors are spending an average of £1.2m to quickly bolster their property investments by buying full portfolios rather than single properties.
These portfolios have usually been gradually pieced together by another investor before being sold as a job lot. For selling investors, it provides an easy and fast way of off-loading a number of properties, while buying investors are able to scale up their portfolios rapidly.
The latest figures showed that these ready-made property packages provided an average of 6.4 bedrooms – an average cost of £196,000 per bedroom – offering an average yield of 2.9 per cent.
As with property investment of any kind, there will be a number of pros and cons attached to such a purchase, and investors need to conduct sufficient due diligence on every property within these portfolios to ensure the scales of profitability tip in the right direction.
The advice process also plays a critical role when it comes to securing the right type of finance to fund such a purchase. Such funding will often be best sourced through the flexibility and manual underwriting processes offered via a specialist lender. And with such products often only available through intermediary channels, this further underlines the value of using a good, professional whole-of-market adviser.
INTERMEDIARY CONFIDENCE
Staying on the topic of intermediary advice, with a range of economic factors affecting UK borrowers and creating an increasingly complex set of financial situations, the need for good professional advice is only likely to accelerate further. This need/demand is generating strong levels of confidence throughout the intermediary community. This was highlighted in a recent Q2 report from IMLA that suggested that 52 per cent of intermediaries are “very confident” in the outlook for their firm. While this is down from 62 per cent in Q1, the data shows that 98 per cent of intermediaries are still confident overall, with only one per cent describing themselves as “not very confident.”
Confidence in the outlook for the mortgage industry, while also down slightly on Q1, remains high. IMLA’s research revealed that 89 per cent of intermediaries feel confident overall, compared to 94 per cent in Q1. There was a similar pattern for confidence in the outlook for the intermediary sector, with overall confidence levels at 93 per cent in Q2, down from 96 per cent in Q1.
Let’s hope these levels remain high in Q3 and Q4, as a range of borrowers need all the support and expertise they can get to help them navigate some tough economic challenges ahead. MI
