'Rising stars' shine at the CML conference!
Published: 18 November 2014 | Author: Bernard Clarke
The 'rising stars' challenge proved to be one of the highlights of our recent annual conference – with delegates and an expert panel voting on four, high-quality submissions. The challenge emerged from our wish to provide a platform at our conference for younger, less experienced voices to explain their ideas around the theme: “If I could change the mortgage market, I would…”
We were delighted with the response, and the way in which ‘rising stars’ seemed to capture the imagination of the industry. We were inundated with good suggestions and were delighted that the four shortlisted candidates each presented such a compelling case for their proposals, and helped to create such a lively and interesting session at the conference.
Each finalist presented his or her idea to the conference audience before being probed by a Dragon’s Den-style panel comprising CML Chairman Stephen Noakes, CML director general Paul Smee and Market Harborough Building Society chief executive Mark Robinson. The panel and audience then decided the winner by voting.
The challenge was ultimately won by Michael Rhodes, service desk manager at Leeds Building Society. In today’s issue, we are pleased to give Michael the opportunity to outline in his own words more details of his innovative proposal for the mortgage industry.
It was a very strong field, and the other three finalists were also praised by the panel for their proposals, each of which identified and set out to address a clear customer need. The other three to present their schemes to the conference were:
- Neil Hoare, of Personal Touch, who proposed an online information service that would enable mortgage customers to benchmark their financial circumstances against other similar households;
- Lynn Jones, of Kensington Mortgages, who put forward a mortgage product open to all borrowers, but allowing those aged 55 and upwards to use a conversion option to release equity; and
- Ben Morgan, of the Royal Bank of Scotland, who outlined a new approach to the online delivery of mortgage advice, helping to fulfil the wishes of many younger customers to conduct business via the internet, even if they need an advised process.
Our thanks and congratulations go to each of them. Today, however, we give pride of place to Michael, and he explains in his own words how his ‘Mortgage Builder’ proposal would work:
"One of the biggest problems for anybody attempting to get on to the property ladder is funding the deposit – regardless of the lender they are looking to get a mortgage from. It can take a very long time to save up for a deposit, especially if the ‘bank of mum and dad’ are not able to fund the full amount at short notice in one lump sum.
A lot of parents open savings accounts for their children when they are very young in order to contribute to the child’s future through tax-free savings with regular small deposits, birthday and Christmas money, etc.
These parents have the best intentions for their child’s future and, when the money is assigned to the child as they come of age, they would be horrified to learn that the life savings had been spent on holidays, booze or meaningless gadgets. They want their hard-earned savings to be used towards a true life purpose…
The solution: The Mortgage Builder!
The concept of the Mortgage Builder is an industry-wide young person’s savings account scheme, opened exclusively for the purpose of saving for a home deposit.
- Mortgage Builders can be opened from when the child is born.
- There could be tax-free savings (if the accounts were registered with HM Revenue & Customs). Perhaps the industry could even lobby for tax-free status once a young adult begins earning when over 16 years of age?
- Different products for different types of saver (with options for regular savers, for example).
The key feature is that withdrawals from the account could not be made for anything other than a house purchase. This could only be made once proof has been shown that a property is being bought (with, for example, sight of a mortgage offer, alongside solicitor’s correspondence).
The earliest that the child (as an adult) could potentially withdraw the funds would be at 18 years of age. However, it is highly unlikely that the account holder would be in a position to buy a property at that stage of life.
- At the opening of the Mortgage Builder, the signatories could choose how long to lock this in for, with, for example, maturity at the age of 18, 21, etc.
- Bonus payments could be added at regular intervals, or when the account matures. This could potentially be paid by the government (showing their contribution to the housing market).
- If the Mortgage Builder comes to maturity, but the account holder is not yet ready, then they could have the option to lock in for a further period.
What would tempt a parent to open a Mortgage Builder over a standard young person’s savings account? They would, of course, have the certainty of knowing that the child’s savings would be used towards securing a house, and not on meaningless activities. In other words, they would be helping them to get along in life.
The Mortgage Builder also offers mortgage benefits, keeping continuity from the savings account to the mortgage account. If the account holder takes out a mortgage with the same institution holding their Mortgage Builder then perhaps either:
- no arrangement or valuation fees may be payable on the mortgage application; or
- they could be entitled to a discounted interest rate; or
- a portion of the conveyancing costs could be paid for by the institution; or
- a combination of all three!
If there are any surplus funds after the house purchase, this could be used in an offset arrangement against the mortgage balance.
Parents already know how expensive home-ownership is. This will help reduce the costs for their children, and teach them that the art of saving generates rewards.
Incentives for lenders
It is clear that institutions would also need to buy in to such an industry concept. They would need to ensure that the incentives in place for both saving and lending are enticing to the parent in order to drum up demand. The benefits involved once the demand is in place are that:
- The deposit gap should be reduced, thus potentially increasing mortgage lending, but in a sustainable manner.
- Mortgage Builder funds would be locked in for a period of time. So, the lender knows how much money is tied up and could be used to fund their own lending and other projects for a period of time. (There would need to be a transfer-in process – similar to ISA transfers – to make sure there is healthy competition.)
- The government would be aware of the number of Mortgage Builders that are due to mature in advance. Therefore, they could plan to ensure there will be enough properties to fund the expected demand.
It is inevitable that circumstances will change in life and the young saver may have to walk away from the scheme. An example of this could be that the account holder does not pass standard lending criteria and, as such, does not qualify for a mortgage with any lender. Obviously, it would not be fair for the account holder to lose all of the savings if this happened; however, neither would it be fair to the industry for these funds to be accessed easily for another purpose than that of a deposit. It is clear that an exit strategy would be required.
However, this would need to be tight and specific in order to ensure that the Mortgage Builder is used for its intended purpose. It would also potentially encourage account holders to keep their credit history clean and look after their finances if they knew they could not obtain their deposit for a home if they allowed bad practice or personal financial mismanagement to creep in.
It is clear that this idea is a long-term solution to the deposit problem, and does not provide a short term, quick win. But this problem is never going to disappear unless it is addressed. It seems logical to start sowing the seeds now, to watch this grow and ripen in the future."
We are planning to develop the ‘rising stars’ challenge in future. Anyone who would like to be involved in the initiative going forward should contact firstname.lastname@example.org.