Does stretching out mortgage terms set up problems?
Sue Heron (pictured) is marketing and sales director at Furness Building Society
A new report from the Intermediary Mortgage Lenders Association provides great news for intermediaries and their lenders.
IMLA outlines that in Q4 2017 those first-time buyers being advised by intermediaries were far more likely to complete on their purchase than a year earlier, with 74% in the quarter successfully completing, sharply up from 53%. Further, success in obtaining an offer also substantially improved, with 88% obtaining an offer compared to a somewhat lower 73% a year earlier.
IMLA also confirmed that this improved performance has not come at the expense of quality: assessments of affordability have remained strong, with the percentage of income given over to mortgage servicing remaining constant, and with average LTVs falling very slightly over the period.
There has also been recent good news from UK Finance, the recently formed trade body.
It has published a report which shows that 365,000 first-time buyers entered the market last year, the highest number since 2006, and a 7.4% increase in numbers over the 340,000 in 2016. Approximately 50% of all owner-occupation purchases which involve a mortgage now go to first-time buyers.
At a time when buy-to-let lending is by many measures depressed, the increase in residential lending as a result of the progress made by FTBs is welcome news, as it keeps us all gainfully employed.
Not all the news is good, however. It has been evident for quite some time that not only are FTBs purchasing later in life, they are also taking out their mortgages over significantly longer time-frames than they did prior to the Credit Crunch.
Clearly, this is due to a range of factors, but the Mortgage Market Review affordability assessment is certainly one factor. For many, an extended term is the only way that they can borrow an amount which meets their requirements.
Although lengthening mortgage terms appear to be inevitable, I do worry that we are setting up problems for the years ahead, and it could be that in resolving one set of issues now, we are simply creating greater issues for later.
Firstly, property values have been rising for several years but it is unrealistic to expect this to continue forever.
At some point, a market downturn will occur, and those who have paid back very little of their borrowing due to being on a lengthy term may well come unstuck (especially if they need to sell at short notice as often happens when jobs are lost during a recession). This puts capital at risk for lenders, whereas a greater level of early years debt repayment resulting from a shorter term would reduce this risk.
For intermediaries, it potentially prevents the ability to remortgage in the first years, putting a constraint on their future earnings capacity.
It also creates the risk of having unhappy clients, and unhappy clients are presumably less likely to refer their friends and families to you.
Secondly, and perhaps more fundamentally, it makes borrowing more expensive as additional interest will become payable (assuming all other factors are equal).
How well are we signposting this to borrowers as an industry? There are some notable examples of good-practice but there is no industry-wide approach.
When a client on an extended term returns two or three years later for a remortgage or product transfer, do you always talk about shortening the term – and provide them with the factual evidence which would enable them to really see the benefits?
I know that here at the Furness we are always pleased to see borrowers come back and reduce their term, even if this means that we potentially lose out on interest. The benefits to the borrower (and to us in terms of reduced risk) outweigh the downside.
Thirdly, borrowers with extended terms are far more likely to find themselves with borrowing which extends into retirement.
There have been some really positive steps taken in recent years to ensure that borrowers who need to borrow after retirement can do so, but surely it should generally be avoided where possible, given that most people will receive less income after retirement than they did before.
Is sufficient sign-posting taking place from both lenders and intermediaries which would enable customers to avoid this where they can?
The fact that first-time buyers are returning to the market can only be a positive step. We should do all we can to encourage and facilitate even more of them returning in 2018, and I would certainly not wish to see them being deterred.
As with most things in life though, there is a balance to be struck, and where we can keep the term down (or probably more realistically, proactively reduce it as soon as possible after the mortgage draws-down) then it feels like we should do so.
If we can do this, the future should be brighter for this group that it has been for at least a decade.