Published: 1 March 2011 | Author: Bernard Clarke
Innovation remains an important feature of the mortgage market. If we are to get back to a vibrant and sustainable working market, it is not just prime borrowers with perfect credit histories that are going to need mortgages. There are also niche groups of borrowers looking for special products that meet their needs and help them move into home-ownership as their preferred tenure.
Unfortunately, the current state of the market means that lenders are working under huge constraints. The continuing shortage of funding means demand for mortgages cannot be fully satisfied, which has led to mortgage rationing – and some niche customer groups are particularly affected.
Other considerations in the post-credit crunch world – in which there is now also intensive regulation – mean that lenders are also driven towards more low-risk business. Innovative products also typically require more specialised underwriting. This may not be justifiable given small volumes of business. It can create a conflict between lenders’ basic commercial aspirations to satisfy niche markets and what they can actually do in today’s market.
In this article, we look at some of the problems encountered by some niche groups of borrowers – and the efforts lenders are making in a heavily constrained market to meet their special needs.
Armed forces personnel
There are 178,000 full-time armed forces personnel in the UK. Last year, the Ministry of Defence (MoD) published a report on ways to support the military covenant – the bond between the nation and its armed forces. Housing and home-ownership for serving personnel were among the issues discussed.
Many services personnel are regularly required to move across the country or abroad, often at short notice and with their families in tow. Credit ratings can be affected by the absence of a long-term UK residence. This can result in restricted access to credit, including mortgages.
At a meeting between lenders and the government in January, the MoD requested that lending processes were reinforced so that service personnel were not disadvantaged and, for example, were permitted to let a home being bought with a mortgage when they were oversees on a tour of duty. Most lenders already offer this flexibility but it is important for the particular housing and credit circumstances of services personnel to be understood.
We have reminded lenders to ensure that all customer-facing lender staff are aware of the importance of servicing this group of borrowers. We are continuing to meet the MoD to see what more can be done to ensure there are no inadvertent barriers to mortgage finance for services personnel.
Lending to disabled people
For many people with disabilities, owning their own home is just a dream. There are 6.4 million registered disabled adults in the UK. According to the English Housing Survey in 2008-9, out of the 985,000 disabled home-owners in England, only 200,000 were buying their home with a mortgage. Taking out a mortgage requires a long-term financial commitment that is not always possible for disabled people who, in some cases, may not be able to continue to work over the period of the loan, although there are state benefits to help, such as support for mortgage interest (SMI).
For many disabled home-owners, SMI is a vital means of support in paying their mortgage. With 64,000 disabled home-owners in the UK claiming SMI (just over one-third of all claimants), a higher proportion of disabled people than other owner-occupiers are likely to have been affected by last October’s reduction in the rate at which SMI is paid from 6.08% to 3.63% – a 40% cut in payments to individual recipients.
In the past, there have been schemes to encourage and support disabled people when buying a home. One such scheme was run by MySafeHome Limited, with mortgages provided by a small number of lenders. It has so far helped over 1,000 people to buy a home of their own, using a modified form of SMI funded mortgage. But sudden cuts in SMI like the one last year can make such products unviable overnight, as the rate is suddenly too low to work for this group of niche borrowers.
We know that there is no foreseeable prospect of the government restoring SMI to its former rate. But if lenders are to rely on the benefit, there needs to be a commitment by government to long-term support. Without this, it is difficult for lenders to have the confidence to support this kind of niche borrower, even though home-ownership may be a more cost-efficient tenure for them.
In response to environmental concerns, some lenders have begun to market ‘green mortgages’. The Ecology Building Society is the most well-known advocate of green lending but there are other lenders such as the Co-operative Bank, Hanley Economic Building Society, Norwich and Peterborough, and the Teachers Building Society involved with this type of product.
The Energy Efficiency Partnership for Homes (EEPH), a voluntary organisation working to ensure the government’s policies and targets for saving energy are effective, has set up a home purchase and finance group to look at environmentally friendly lending. It describes a green mortgage as one offering "a financial incentive which encourages the home-owner to buy or to work towards a high energy performing home."
The EEPH goes on to explain that a financial incentive could include a lower rate, cashback, no early repayment charge, no fee, a higher loan-to-value ratio or a more favourable length of term. To qualify, the home-owner must agree to undertake energy efficiency improvements to the home, such as cavity wall or roof insulation, or the home must already exceed a set standard of energy efficiency.
Currently, though, there has been limited take-up of these kinds of mortgages, either as a result of consumer indifference or pressures on household finances. Low take-up diminishes the commercial incentive for lenders to promote these mortgages, and they remain in the hands of a relatively small minority of lenders.
Meanwhile, the government is spearheading a range of initiatives to remove the barriers to making improvements to make homes more energy efficient, most notably through the Green Deal, which allows consumers to install energy efficiency measures in their homes, funding the improvements through a charge on their energy bill, which provides an alternative to mortgage funding. The government hopes that consumer interest in – and take-up of – energy efficiency measures will increase, which may encourage lenders to develop more mainstream products in this area.
The reality is, however, that the biggest impact lenders are likely to have on improving the environmental performance of housing is through the use of straightforward mortgage advances to fund home improvements. Although this is not a "green" mortgage, almost all lenders will consider a further advance from a creditworthy borrower who wants to make improvements to their home, including those that enhance its environmental performance.
First-time buyers are perhaps the most obvious and high-profile group of niche borrowers. The problems they face are widely reported in the media and readily acknowledged by politicians. Earlier this month, the housing minister, Grant Shapps, organised a summit to look at what can be done to help this group.
There is no "magic bullet," as we discussed in the last issue of CML News & Views, and conditions for first-time buyers may not improve significantly until funding increases and confidence in lending decisions and the housing market is restored.
The various schemes and initiatives that individual lenders offer to help niche borrowers show that UK mortgage lenders still believe in innovation, and will continue to try to open up home-ownership to people with different needs and backgrounds. Unfortunately, however, there are many more challenges in a market constrained by a lack of funding and aversion to risk, underpinned by regulation.
There are also difficulties for lenders in engaging with niche borrowers, and taking forward initiatives that would help them, because of the lack of economies of scale. That can make new products too expensive to set up and administer – an important concern in current market conditions.
In time, we must all work towards a restoration of more funding, competition and active participation by firms in the market to widen choice and the potential for lenders to target and meet the home-owning needs of niche markets and their prospective customers.