Large loans are no longer a rarity in the world of intermediary mortgage lending and are increasin...
Large loans are no longer a rarity in the world of intermediary mortgage lending and are increasingly becoming available for applicants traditionally regarded as 'sub prime'.
Recent market research by Future Foundation reported that the number of 'mass affluent' individuals in the UK (those with around £50,000 in liquid assets) is set to grow by a third to five million by 2005. Enhanced employee share ownership, static top-rate income tax and declining corporation tax are all expected to contribute to this increase in personal wealth. Although this news was reported primarily in connection with the opportunities involving investment advice, the effect on the mortgage market may also be considerable.
Taking out a mortgage often coincides with major life changes such as starting a family or a move up the career ladder, and these are times when borrowers are likely to be reviewing their financial arrangements such as investments and insurance.
This mortgage watershed is as true at the high-value end of the market as it is for medium and smaller loans. Advisers whose clients include high net worth individuals Ã including those who will find themselves among the ranks of the mass affluent Ã need to keep abreast of trends in the high-value mortgage market to maximise the benefits of keeping close to their client base.
A lot of media attention has recently been focused on the trend towards buying mortgages direct through the internet. However, it is unlikely that internet sales will make great inroads into niche mortgage areas such as high-value loans.
While the 'middle of the road' type of customer Ã with a substantial deposit, a steady well-paid job and a good credit profile Ã will quickly find a mortgage to suit their needs, niche borrowers will always look to the expertise of mortgage advisers. This is because internet mortgage sites are designed to cater for the mass markets quickly and easily, but cannot serve as a substitute for consulting an experienced and knowledgeable financial adviser when non- standard borrowing needs come into play.
The Council of Mortgage Lenders (CML) recently confirmed that the intermediary mortgage market is not only buoyant, but it is also dealing with the higher value loans: 35% of mortgage deals are introduced by intermediaries but they are currently providing 46% of the total value. Against these sizeable percentages, only 0.3% of mortgages are sold through the internet.
Standard mortgage borrowers have always been able to look after themselves by going direct to lenders, through whatever channel. Advisers therefore need to become more knowledgeable about the niches if they aim to offer a good service to their clients. This will undoubtedly include borrowers who need high-value loans, which in turn will yield substantial introduction fees for the adviser. Where the introduction fee is based on a percentage of the sum advanced, it is obvious that arranging high-value deals will prove more profitable than bread and butter business.
One mortgage application for £1m may involve twice as much work as one for £70,000, but the rewards will more than compensate for that extra effort.
Advisers wanting to succeed in this sector need to be well equipped with not only product information but also a good idea of the market forces at work, and here regional peaks and troughs of earnings and property values will play their part.
Recent earnings figures published by the Government show no surprises, with earnings in the City of London more than 100% greater than the national average.
Perhaps more interesting is the fact that the overall number of relatively high net worth individuals is on the increase. Recent research by the global information company Experian shows that there are nearly 180,000 millionaires in the UK, and these wealthy people want their affluent lifestyles to be supported by substantial properties.
This often means that they will seek high-value mortgage loans.
Average property price figures from HM Land Registry show areas where values are highest. Once again, Greater London tops the league table of values, with the average detached property changing hands at around £441,000, with Windsor and Maidenhead coming in a close second at £423,000 and Surrey coming third at £364,000. Buckinghamshire and Hertfordshire complete the top five regions, both exceeding £300,000 for an average detached property.
Within these high-value areas and elsewhere, top-quality family homes in city centres and those with a few acres in the country are valued at well over the £m mark Ã making the need for higher value mortgage loans common in this property sector.
The growing popularity of borrowing to invest in rental property (buy to let) has blurred the distinction between residential and commercial lending, and has led to high-value loans being requested by those whose normal incomes are moderate, but who wish to own a portfolio of investment properties.
It remains to be seen whether the recent stock market downturns will boost the sale of rental property as a more 'safe' investment.
Irrespective of this, the rental sector is already booming, and the entrepreneur who is willing to take on a portfolio can have a considerable amount of overall debt, as borrowings are linked to property rental values not earnings.
The rewards and risks of investing in a number of properties as a business are higher than in the simple world of borrowing to buy your home, as they are with all entrepreneurial activity. People can find themselves collecting the sort of credit profile that takes them out of the mainstream. And this goes for many high earners, whether employed, self-employed or owning a business.
So, it follows that advisers must be aware that applicants who fall into the high-value loan niche may also fall into the non-conforming category, where past arrears, County Court Judgements (CCJs) or bankruptcy will mean that most lenders will not be able offer them loans. In such circumstances, the specialist non-conforming lenders need to be brought into play.
Although mortgage arrears are falling and CCJ figures are holding steady year on year, the amount of personal insolvencies (bankruptcies and individual voluntary agreements) are rising. The year 2000 total was 29,500, 21% up on the 1998 level of 24,400.
However, changes in the way we view bankruptcy are in hand. Last year, the DTI published a White Paper entitled Bankruptcy: A Fresh Start, which seeks to allow those who have become bankrupt without involving recklessness or fraud to become discharged (and therefore to re-open lines of credit) in six months rather than three years. This is to encourage entrepreneurism (and the associated risk-taking) by minimising the public humiliation formerly associated with bankruptcy.
The concept of no blame adverse credit factors could rapidly take hold. So, within a climate of high personal debt, the mortgage market may soon have to reassess its current basic categorisation of borrowers as 'prime' and 'sub prime' to accommodate these new ideas. As a result of this, broader credit assessment of borrowers as individuals, rather than as sets of financial characteristics, could evolve.
As ever, this will mean extra work for advisers but possibly with greater chances of success in getting mortgage offers for applicants with complicated financial and credit circumstances, which must mean better business for mortgage advisers in the long run.
John Prust is sales and marketing director of Southern Pacific Mortgage
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