Viewpoint

Growth in the specialist mortgage market

Colin Shave
or almost all of us, purchasing a property is the largest nancial outlay we are ever likely to undertake. A healthy deposit, a regular income and a good credit history are the usual requirements when it comes to home-shopping time . . . and even then, securing a mortgage is never a given. But what options are available for consumers who do not full all of the usual mortgage lender criteria? More importantly, how are lenders adapting to accommodate new types of customers in the market and what types of product can they offer such customers?

Colin Shave is the chief executive ofcer of GE Money Home Lending and has overall responsibility for igroup and First National. He provides strategic leadership for both brands in the marketplace and is the leader of the senior management team. Colin was born in Cape Town, South Africa, and after graduating with a BS and MBA, he joined GE on the Financial Management Programme in 1976. He took over the role of CEO GE Money Home Lending in March 2004 following a year as CEO of First National Home Lending. Outside GE Money, Colin has a wide range of interests, including all sports (active in golf and squash), travel, reading and foreign languages.

With an estimated nine million people unable to get a regular mortgage from a traditional lender, the UK specialist mortgage market has gone from strength-to-strength, providing huge opportunities for lenders to satisfy ever-increasing customer needs. But before you can understand this market and specic areas that are driving its rapid growth, it is important to understand exactly what the term sub-prime means and where the market it refers to has emerged from. In short, sub-prime (non-conforming or specialist lending) refers to people whose circumstances do not conform to the mainstream or the High Streets more rigid lending criteria. Evolving in the USA, this form of lending was borne out of the ability of lenders to adapt more sophisticated underwriting and risk assessment techniques. In the UK, there is a commonly perceived stereotype that sub-prime lending refers solely to those with poor credit histories and county court judgements. While sub-prime does cover such cases, it also refers to self-certication mortgages enabling self-employed individuals, who invariably experience uctuations in their income, to borrow. Providers will invariably require the self-employed individual to certify their annual income without necessarily having to supply documental proof (subject to certain limits and criteria). In addition to self-cert there is the highly talked about buy-to-let market. In fact, these two areas are primarily responsible for the current booming growth in the UK specialist mortgage market. Figures reveal sub-prime borrowing represents a relatively small increase in Compound Annual Growth Rate 14 percent CAGR since 2001 compared with self-certication at 36 percent and buy-to-let at 44 percent. Impressive gures that prove the lions share of growth in the non-conforming market is from borrowers with special circumstances not just from those with a poor credit history. Overall, the sub-prime market has grown for a number of reasons. Predominantly the long term fall in interest rates has made borrowing cheaper, while the continued strength in the housing market has contributed to a 14 percent CAGR across the sector. However, in an atmosphere of high consumer debt, non-conforming lenders bear a responsibility to their customers and must ensure that they carefully assess a borrowers ability to repay and offer them appropriate loans. This has resulted in a number of lenders moving away from the traditional crude income multiple-based lending system, towards affordability models. A fairly recent phenomenon in the housing market over the last ve years is the number of self-certication mortgages taken out. The explosive growth of this sector is in contrast to the rise in the number of self-employed people in the UK, which has remained relatively static during this time. This indicates that there are various other factors at play.

DOI 10.1108/02580540710743149

VOL. 23 NO. 6 2007, pp. 3-4, Q Emerald Group Publishing Limited, ISSN 0258-0543

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The demand for self-certication has been building gradually since the late 1990s and once suitable products came into the market, consumers rushed to take advantage of their situation and apply for the new mortgage offerings. The development of more sophisticated products has provided wide-reaching options for the self-certifying market, allowing providers to meet this increasing demand. Some critics have argued that these loans are open to misuse by employed borrowers who opt for them in order to inate their salaries and obtain bigger loans. GE Money Home Lendings self-cert range is available to self employed people only and lenders need to be extremely careful to ensure that they are offering the right type of product to the right type of consumer. It is in the interests of neither borrower nor lender to stretch affordability in this way. Moving forward it is likely that the self-cert market will fall into line with the rest of the housing market as buyers needs have been all but met by lenders. In the last two to three years, the buy-to-let market has also experienced explosive growth, advancing far beyond the self-certication mortgage sector. Key factors driving such huge growth include the continued increase in house prices driving rst time buyers into rented accommodation; the immigration resulting from the expansion of the EU; tax breaks and, of course, the fact that the housing market tends to out-perform the stock market in return on investment. Increasingly, for those consumers that can afford it, investing money in bricks and mortar has become one of the best ways of securing growth and is now often see as a viable alternative to a pension fund. The key driver over the last 12 years, however, has been the fall in the percentage of rst time buyers in the whole of the house-buying market as house prices have consistently increased. There are a growing number of consumers who cannot afford to buy property and are forced to rent. Given the expanding number of people unable to get on the ladder, demand for rental properties has soared, and with that, the buy-to-let market as a whole. On top of this, low interest rates have proved to be a further incentive for buy-to-let borrowers, helping them to purchase new properties without stretching themselves beyond their nancial means. So how does a lender take advantage of this growth? For mortgage lenders keen to understand and take advantage of the new opportunities in niche markets, it is vital that they understand market needs, map out the key drivers for growth and ensure that they remain sufciently exible in their approach. Flexibility is the key in this market and lenders would do well to avoid locking themselves into one specic model. Fundamental to growth, however, is understanding customers specic needs and ensuring that they are being offered compelling and timely propositions. The UK mortgage market has undergone huge changes in recent years, as the social demographic has evolved and divided. New market sectors are coming of age with consumers within those sectors having their own unique needs, requirements and limitations. When these new customer types emerge new niche markets are created. Those lenders and nance providers able to grasp and embrace such changes, are the lenders who are most likely to succeed. As consumers lending requirements become ever broader in the future, it is the lenders that remain exible, knowledgeable and above all committed to their market, that are most likely to be successful in gaining the trust and business of consumers.

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