Society can and should accept risk
John Phillips is financial services director at Kinleigh Folkard & Hayward
Mortgage product innovation has taken a back seat understandably for the last five or six years.
In fact arguably not since the arrival of Current Account mortgages and Off-Set mortgages have we really seen anything approaching innovation – despite the subsequent claims of lenders in recent times claiming 85% LTV as being innovative.
The reasons for this are well documented but the market growth we are experiencing, if managed properly, should prompt a rethink among lenders when their market share comes under pressure – especially if they want to protect their margins and not become a commodity suppliers.
House prices have been rising – in some areas rapidly – and mortgage debt is once again increasing as affordability overall worsens, hence the government schemes to help.
Previously in these conditions, the standard mortgage has been usurped by mortgages with nonstandard features, such as longer terms or interest-only payments.
The obvious benefit to consumers of innovative (not careless) lending is that it allows households to enter owner-occupation and to vary their expenditure patterns.
Of course, such mortgages can be more risky: the interest-only borrower does not accumulate equity as an repayment borrower does, and loans with longer terms expose the borrower to greater risk of interest-rate or other economic shocks.
However, short of nationalising the housing system, some parts of society can and should accept risk.
Many self-employed people who have been starved of products represent very good borrowing risk – in many cases better than those in salaried positions.
Certainly the technology exists to help gauge risk accurately. Marginalized constituencies will play an increasing role in lenders plans. Work patterns are changing, with more labour mobility, less secure full-time employment and more part-time, casual employment and self-employment.
As market share becomes an increasing pressure, I expect to see lenders re-engage meaningfully with these consumers.