Capital market confidence, or rather the current lack of it, may be dictating the amount of adverse credit business that mortgage advisers are able to place for the time being, but they must not forget the crucial opportunity they have in distributing prime mortgages, particularly for customers with specialist requirements.
This opportunity was recently highlighted by the Intermediary Mortgage Lenders Association (IMLA), which pointed out that more prime business is distributed through intermediaries than is generated directly from consumers through lenders’ branches and websites.
At the time, Peter Williams, IMLA’s executive director, said: “Specialist, intermediary lenders are often associated with non-conforming, buy-to-let (BTL) and other forms of non-conforming lending, but we mustn’t overlook the fact that significantly more prime business is handled through intermediaries than direct – £140 billion for intermediaries compared with £115 billion direct.
Even so, non-conforming business does represent around 30 per cent of the whole market and as much as 40 per cent of intermediary business.”
Non-conforming does not always equal adverse credit
Such has been the media hype surrounding ‘non-conforming’ following the problems faced by over-adventurous lenders in the US that it can be easy to forget that non-conforming does not necessarily equate to adverse credit.
Self-cert and BTL are both more complex products than the traditional mainstream, often requiring specialist advice, yet BTL has a statistically lower risk profile than prime lending, and most self-cert is for prime borrowers who are unable to provide full documentary evidence of their income.
According to IMLA, well over 90 per cent of this non-conforming business is handled by intermediary lenders, and brokers handled in excess of £230 billion in 2007.
This year’s market is likely to be slower, but key economic factors, such as low unemployment and growing demand for housing, indicate it will be steady and advisers can look forward to substantial levels of activity, particularly in the core prime specialist markets.
The private rental sector has grown by 21 per cent in five years, fuelling BTL, according to the a UK Housing Review that was recently published by the Building Societies Association (BSA) and the Chartered Institute of Housing (CIH).
The report says that half of all household moves are now into the private rental sector. Yet the sector still accounts for only 25 per cent of the total UK market and so there is still room for growth and that means continued opportunity for BTL landlords.
The main factor behind this opportunity is that in the UK we are still in a situation where demand for homes greatly outstrips supply.
In ‘Homes for the Future’, the Housing Green Paper issued by the The Communities and Local Government department last July, it was recognised that while the housing stock is growing by 185,000 a year, the number of households is projected to grow at 223,000 a year.
This suggests that house prices are unlikely to experience significant deflation any time soon and, according to the BSA and CIH report renting remains the most affordable option for many people.
The report says that average ratio of mortgage costs to income for first-time-buyers is now higher than it was in the 1990s at the peak of the last housing boom, as first-time-buyers were devoting nearly 35 per cent of their income to mortgage costs by Q3 2007, compared with the previous high of nearly 34 per cent in 1990.
The sharp rise in house prices and mortgage costs contrasts with the pattern of private rents, which have kept pace with earnings, resulting in substantially lower rents than mortgage costs on equivalent properties.
While low rents are clearly not good news for landlords, the continued demand for rental property is, and BTL should be seen as a sustainable long-term investment – not a short-term recipe for riches.
Even during times of house price uncertainty BTL can offer investors a natural hedge to the market. Where there is uncertainty regarding house prices, first-time buyers are more likely to defer their first step on the ladder and require rental accommodation for longer – providing extra stability for the sector.
Meanwhile, ongoing demand from a growing student population, increasing immigration and a rise in the number of single-person households provide further solidity for the market.
The one niche area of BTL where there could be reduced demand is for new build properties, but this is unlikely to impact on the sector’s overall stability.
Far from a slowing trend
Demand for self-cert also remains strong. Research from Datamonitor states that almost 13 per cent of the UK workforce is self-employed.
It is the highest number of self-employed entrepreneurs in the UK ever, and market trends suggest that this growth does not look like slowing down anytime soon, particularly if the confidence of current business owners is anything to go by.
According to the latest Kensington Self-Employed Index nearly seven out of every 10 business owners say they are ‘very confident’ or ‘quite confident’ about their business prospects over the next six months.
Given that the latest figures from Datamonitor estimate the UK’s self-employed workforce to total up to 3.6 million, this means that there are 2.48 million self-employed people with a positive outlook for their business – 100,000 more than last quarter.
Against a backdrop of volatile equity markets, rising fuel prices and economic uncertainty, this growth in confidence demonstrates the strength of the self-employed sector and signifies a positive trend in the resilience of the UK economy.
The index also found that 44 per cent of business owners expect to see an increase in turnover over the next 12 months, with only 7 per cent expecting turnover to fall.
On the back of this confidence, more self-employed people than ever before are looking to invest in their business, with 62 per cent considering spending money on new materials, equipment, vehicles or training in the next year. This figure is up from 55 per cent last quarter and 58 per cent this time in 2007.
The self-employed are therefore confident about their prospects and according to Datamonitor, currently around 55 per cent of self-cert customers are self-employed workers, with a further 34 per cent made up of contract workers, agency staff and seasonal workers.
This means that almost nine out of 10 self-cert borrowers are people drawn to the product because they have non-standard employment practices or incomes. With more people working on short-term contracts, on a seasonal basis or receiving multiple incomes, self-cert continues to provide the flexibility that these consumers need.
Strong prime BTL and self-cert markets are great news for mortgage brokers as these individuals will often have specialist circumstances and require sound financial advice to help match them with the right product from the right lender – and the fundamentals behind these markets indicate that there is great opportunity for intermediaries in 2008.
The fight for prime is on and if you ensure you are up to speed on all of the specialist prime products in the market, you can make sure that you are ultimately the winner.