The three big mortgage changes that no one is talking about.

Aug 12, 2022

There is a lot going on in the mortgage and property markets right now, with most of the discussion being taken up by interest rates, property value predictions and costs of living.

Under the surface there are other important changes, bubbling away. Here are our top 3:

1. Consumer duty and ‘run off’ costs.

Last month, Mortgage Solutions addressed the FCA’s publishing of their ‘consumer duty rules’. Whilst most of the focus has been on optimum customer outcomes and demonstrating how these will be met, there has been an announcement regarding lenders’ pricing of mortgage products themselves. In a July Mortgage Solutions article, Lana Clements wrote “Financial firms will no longer be able to charge extortionate fees or prices for products and services, meaning lenders will not be able to offer unjustifiably high standard variable rates (SVR), under new rules from the regulator.”

To anyone with a broadband package this issue and the ‘loyalty penalty’ may sound familiar. Citizen’s advice issued a super complaint a few years back to put a stop to loyal customers being charged more than new customers. Now it seems the FCA wish the same to happen to mortgages.

This all sounds great, in theory, and if SVR’s are simply reduced with no other compromise elsewhere, brilliant. However, if lenders are forced to decrease their SVR’s, will they simply do so for an honourable pat on the back? Or perhaps will they counteract that loss by increasing costs to new borrowers on new introductory deals such as fixed rates? Bear in mind that most SVR’s are now 5-6%, where previously they were 4-5% 3 or so months ago…

The impact of this consumer duty remains to be seen. Surely borrowers would rather cheaper initial deals, on the understanding they need to manage their finances and switch deals, as opposed to not having to be as organised, but everyone being charged more overall?

This seems a case of ‘careful what you wish for’.

2. Private equity and rent-now-buy-later schemes

With the HTB scheme ending British buyers are having the rug pulled out from under them somewhat. They have become accustomed to being able to ‘tack on’ an extra 20% to their property value (40% in London), when their deposit and income couldn’t obtain the property they desire. Being pedantic, It’s not actually 20% or 0% of the property value, but you get my point. Up steps private equity lenders and rent-now-buy-later schemes.

The private equity schemes are essentially private versions of help to buy. You put down a small deposit (5% usually), take a mortgage and use the private equity loan to boost up the property value you can buy, just like Help to Buy (HTB). The main players for this are Proportunity, Ahauz and Even.

A notable difference to the HTB scheme is that these private equity loans do not restrict availability to new build developments, so the loans can be taken on older properties. Lender options are currently quite limited (Tipton and Kensington being the main pioneers), but more and more are recognising the private equity loan option as a good replacement for HTB. Some major high street lenders are already signed up, with news of more to follow.

Private Equity loans will share the profit, but will also shoulder the loss if the value drops.

Rent-now-buy-later schemes are being pushed forward by a company called Keyzy. We have used this for clients where it turned out they weren’t able to get a mortgage in the end, but had a property they still wanted to buy.

Here is how it works. Keyzy buy the property for you, charge you market-value rent plus 25%, but they put the extra 25% to one side to build ‘deposit’ as equity. Once you reach a stage where you can obtain the required mortgage you do so and buy the property. The main selling point of Keyzy is you buy the property for the original purchase price plus Keyzy’s buying costs at the outset (stamp duty and legal costs).

This is the main benefit compared to the private equity loans, you are buying the property at the initial price, whereas an equity loan must be ‘bought out’ based on the property value at the time you wish to do so; which is the inherent risk of th equity loan. Property prices could (and on average do) outstrip income increases significantly. This means that in one sense (ignoring amortising of the mortgage debt) the ability to ‘buyout the equity loan’ arguably gets harder (in one sense), as time goes on. This is particularly relevant for people drawn to equity loans, as they are normally borrowing toward the top end of their capability and using the equity loan as a further boost.

Nonetheless for the right client with something specific holding them back from a ‘normal’ mortgage/deposit purchase, these options provide a steppingstone and foot on to the ladder, which, all risks and compromises considered, are still likely better overall than continuing to rent.

3. Lender’s reluctance to lend!

Who would have thought it, a mortgage broker finishing an article recommending you speak to a mortgage broker…

Here is an inside secret. Right now lenders are not as keen to lend as they were. Many lenders are looking for reasons not to lend. Any broker who has arranged a mortgage with TML this year will tell you that! (Sorry TML but…)

Whilst there are still a decent enough number of lenders who are applying discretion even-handedly to mortgage applications, there are now far more, using it to back out of deals.

Property down-valuations are on the rise. Rental down-valuations are on the rise for BTL’s despite the cost of rent going up. More and more clients are finding the mortgage available being reduced mid application for this reason, but also on a ‘discretionary’ basis which is more directly linked to the lender’s appetite, than valuations contracted to third party valuers.

Any mortgage broker saying it isn’t happening to them more frequently is either lucky, blessed with easy cases, or lying.

Right now, using a broker who knows the post application quirks and pitfalls of the relevant lenders is more important than it has ever been. Particularly whilst lots of lenders are taking 2 weeks to respond to any case update. You could easily end up 2 months down the line and declined, faced with starting the process again and, at potentially even higher rates again!

A good broker who takes time to check not just criteria, but the lender’s appetite for your specific situation and how they will interpret your documents, are worth their weight in gold right now.

Told you I was biased.

For more information on the future of mortgage rates read our related article here. But in particular if you had shelved the idea of buying because ‘help to buy’ is finishing, you really need to reach out, as we starting to help lots of people in this space.

Steven Morris – Advising Director

CeMAP CeRER

 

Steve loves a complex mortgage. Most recently he has used his technical geekery to work his way up through Which? Mortgage Advisers, progressing to Senior Adviser and then Onboarding Manager. There, he was responsible for hiring, training and managing new advisers.

He also ran the monthly new starter inductions and wrote and maintained the telephony advice standards of the company. Outside of work Steve can be found coaching and being run ragged by his local under 10’s rugby team, Bristol Harlequins RFC.

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