As talk in the media generally tends to focus on first-time buyers and London house prices, it’s easy to forget about the non-prime mortgage industry.
It may appear to outsiders that the market has faded away, but non-standard customers are as important as ever – even if the market looks different from the past.
But there are opportunities ahead for all operating in this arena.
Demand is always a key issue. To put it simply: are the customers out there? As the wider economy improves, cases of borrowers suffering blips in their credit history, self-employed start ups, BTL investors and other customer niches will still be out there. These customers have not disappeared.
There are millions of people with interest-only mortgages, many of whom will need to take action to manage their financial situation. The self-employed and those with complex incomes can struggle to get a loan with mainstream mortgage providers.
Mainstream lenders may have not really attempted to muscle in on these niche markets since the financial crisis because there are enough ‘vanilla’ customers in the market which combined with new capital adequacy rules means the major lenders are focussed onto their core, prime business which is enough to fill their coffers.
As both the non-prime and the wider market grow, this means more of the supply will come from new entrants and challenger brands, funded through wholesale funding. Lenders including Precise, Kensington and Magellan have already shown what modern specialist lending looks like. It may be difficult to match the big banks on price, but they can still be beaten by smart criteria and flexible underwriting.
Similarly, regional building societies do not have the distribution networks to compete with national brands, so have also provided a home for non-prime customers.
In the distribution arena, we see a comparable divide. As mortgage brokers become more consumed with standard cases, we are seeing further growth in specialist support such as aggregators (eg BrightStar and Connect) and specialist brokers.
With an increasing number of lenders to turn to, it can be difficult for mainstream brokers to know the specialist market inside out. In the short term, distribution will therefore go back to being specialised and this will ensure case quality is high and the reputation of the industry continues to grow.
The Financial Conduct Authority is also looking at this area and has taken steps to level the playing field. Today, new entrants are not disadvantaged although the regulator will rightly be keeping a keen watch to make sure the market grows at a safe and steady pace with a focus on good customer outcomes.
Both lenders and intermediaries across the industry have made sure the customer is at the heart of everything they do and this will benefit the wider market as time progresses. Regular conversations with the regulator will help make sure the customer experience is protected the future for specialist lending looks bright, as long as the industry learns from the past and ensures everyone is working to a high standard.