Under pressure Guiding clients in the cost-of-living crisis
Fund times The equity release boom set to continue
At what cost? Reports that lenders are ‘down valuing’ properties
development to the next level.
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Welcome to the latest edition of Mortgage Professional. As a board, we are committed to promoting the value of professional standards and advice both within the sector and with consumers. This year our focus has been to raise awareness of the benefits of professional advice with consumers, firms and protection specialists involved in the mortgage market. This has never been more important than today. Family budgets are under pressure with energy, food and fuel prices increasing, as well as growing inflation and increasing interest rates.
In addition, the new Consumer Duty regulations will mean advisers need to take time to understand the implications for their firms, because the changes are much more than TCF Mark2. The launch of our Associate Firm initiative last year to broaden the appeal of the Society of Mortgage Professionals (SMP) to firms and not just individual advisers has been a huge success. The SMP now has more than 11,000 members as well as 40 member firms representing more than 5,900 employees.
We aim this year to promote mortgage advice as a socially useful and important career. To discuss succession planning and managing exit and retirement from the profession.
To provide thought leadership on how to identify a mortgage professional and the values, behaviours and culture of firms.
Carlos Thibaut highlights the themes which the Society is focusing on and the importance of guiding clients in challenging times
This is a core focus for the SMP this year. We aim to look at the environmental issues affecting our sector, including heat pumps and energy certificates while working with partners to publish documents on the subject.
Providing thought leadership for firms on best practice will cover several key areas, including: technology; client management and engagement; lead generation; growing firms’ business; and planning, developing and maintaining a distinctive and relevant company culture.
In any business, building a customer-centric culture is a prerequisite of successful organisations. An environmental, social and governance culture can act as a framework to ensure the business focuses on key issues to respond to changing consumer demands. From deciding on the core advice proposition and what services are included, to looking at how to communicate and engage with consumers, we will be focusing on a range of subjects to help businesses create long term value for all stakeholders.
In this issue, we have a number of articles that are a must read: Liz Syms talks about the pressures that advisers face and how SMP resources can help. Mortgage brokers are being faced with unprecedented changes in mortgage rates and product withdrawals, how can brokers manage client expectations? The equity release boom continues despite increasing interest rates, with the trend likely to continue. Banks appear to be hardening their stance on property values, Liz Booth reports on why clients need professional advice.
With unprecedented pressure on consumer budgets from unprecedented increases in energy costs and fuel prices and increasing interest rates it has never been more important for advisers to reach out to clients. It will be vitally important in the months ahead to ensure clients’ circumstances are regularly reviewed by ensuring a robust process of client engagement is in place, reinforcing the value of protection in stretched budgets and ensuring suitable advice is in place to reflect individual’s changing circumstances.
Enjoy the read.
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Carlos Thibaut is chair of the Society of Mortgage Professionals
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Those of us in the mortgage advice profession are used to overcoming challenges and, today, we face a whole range of issues brought about by the cost-of-living crisis and rising interest rates, which affect affordability and service for our customers, while placing considerable pressure on advisers. Every day seems to bring multiple rate updates and a rush to get the application to the lender by the cut-off time or lose the rate you have quoted your client.
Liz Syms reflects on the pressures which advisers face and the resources of the SMP which can help
What is troubling is that the speed an adviser needs to put the application together to catch the rate makes us more prone to errors. For example, in a recent case I reviewed, the broker had selected a 90% loan-to-value (LTV) product for the customer. However, due to their residential status, they only qualified for the 85% range.
Unfortunately, partly due to the lender’s inevitable underwriting delays, several weeks passed until the error was uncovered. Although the client had the funds needed for the extra deposit, rates had risen in the interim and they were now facing a much higher interest rate than the one they could have selected had the adviser not missed that vital piece of criteria.
When it is 3pm and the lender suddenly announces they are withdrawing the rates at 5.30pm, situations where errors are made are inevitable.
It goes without saying that doing whatever you can to check all the criteria elements before submitting the application is incredibly important. As well as useful tools such as SmartrCriteria and KnowldgeBank, lenders in the main now publish their full criteria on their websites, so there are lots of places you can crossreference information.
The constant rate increases have also put considerable pressure on the service lenders give. Many lenders have turnaround times of 14 days or more. The delays become particularly problematic when underwriters appear to drip feed questions and you end up in a continuous loop providing one document, waiting for 14
days before being asked for another and so on. Applications can drag on for a considerable amount of time and this can also be incredibly frustrating for the client, who may see this as a service issue of the adviser.
‘Packaging’ a case correctly has become essential to an adviser’s role.
An underwriter has not had the benefit of sitting in front of the customer and understanding their financial circumstances the way you do. An application form is very black and white in what it asks, so it is up to the adviser to bring to life the application with the addition of soft facts and explanations that the underwriter may not otherwise appreciate. All applications have a notes section that you can complete with additional information to help. It is also worth reviewing the lenders underwriting guides. Most lenders have developed these to help you understand the documents and supporting information they need, so if you can invest some time to follow these guides, you should hopefully be able to speed up the underwriting for your customers.
they will not be named on the property and land registry, minimising tax complications and allowing stamp duty benefits to still be used.
For BTL, an investor could look to purchase via an LTD Company to improve the rental calculation or could look at generating higher yields by turning the property into a HMO or a holiday let. One area to watch out for is existing BTL properties arranged on a fiveyear fixed rate that will expire in the next couple of years. When the Prudential Regulation Authority introduced the new affordability rules, five-year fixed rates became very popular as the calculation method could maximise the amount of borrowing. There is a big chance the current rate is considerably lower than the rate available today, which could mean the existing loan no longer meets the affordability rules.
Rate switches may become more popular, but this does not help the borrowers with specialist lenders who do not offer rate switches, nor will it change the rate shock some of these borrowers will experience.
But what if the application doesn’t fit? There is pressure on affordability with rising interest rates in both the residential and the buy-to-let (BTL) markets. So, what are the options if you have a motivated client but cannot get to the right loan amount?
For residential, it is worth investing time to understand the lenders that offer the Joint Borrower Sole Proprietor (JBSP) mortgages. JBSP is where the lender allows a family member to be a mortgage applicant and the family member’s income is included on the application for affordability. However,
With all of this to think about, at the same time, the launch of the Consumer Duty paper adds further pressure on advisers. Advisers need to consider the implications of the paper for their businesses and the changes they may need to make.
Fortunately, support and education are available from a range of resources in the market and via the Society of Mortgage Professionals, so try also to set a little time aside to invest in your own development and you and your customers will reap the rewards.
To find up-to-date guidance and resources, visit: www.smp.org.uk ●
Liz Syms is CEO of Connect Mortgages and board member of the SMP
Just as the mortgage rules from the Bank of England ease, the banks themselves have hardened their stance on mortgage values. Liz Booth reports on why clients need advice more than ever
UK average house prices increased by 7.8% through the year to June 2022, down from 12.8% in May 2022, according to the Office of National Statistics (ONS). It has found that, despite UK house prices increasing between May and June 2022, annual house price inflation has slowed due to the rises in prices seen in June 2021, which were the result of tax break changes. The average UK house price was £286,000 in June 2022, which is £20,000 higher than this time last year.
In the past two years, the ONS reports, house prices have risen as pent-up demand followed the Covid-19 pandemic, people looked to make changes in their lives and moved house as part of that and as the government introduced tax incentives to buy.
However, the figures also revealed that the increase in prices has started to slow down as those tax breaks
ended and as inflation started to climb, along with increasing interest rates.
But there are other factors at play.
James Ewles, director, Brancaster House, explains: “After the 2008 crash, the Bank of England introduced [rules] to tighten up the market and try to prevent people being given mortgages they couldn’t afford.
“Not only did it take into account whether you could afford to keep up your mortgage repayments in the here and now, but it also assessed affordability if the interest rate rose by 3%. The result? Lots of people who could easily afford a mortgage at the existing rate were unable to access one, based purely on a ‘bad case scenario’.”
He continues: “The particularly galling part was that some first-time buyers were being turned down for a mortgage, despite paying more in rent than their mortgage repayments would have been. Anyway, that’s ancient history now, because the Bank of England have scrapped it –it’s gone.”
First-time buyers continue to act as the biggest driving force in the housing market, accounting for 177,000 or 35% of all property transactions in the UK. However, Zoopla has warned that firsttime buyers on lower incomes, homeowners looking to trade up on their current home and buyers in the south east of England and London, could feel the greatest impact in affordability as interest rates climb.
And there is another problem: the banks.
According to reports in the Telegraph, banks and surveyors are “down valuing” as many as half of homes in some parts of the country amid fears sharp house prices falls could soon follow.
But it seems this is a bit of a selffulfilling prophecy: if the banks down play values then people could be forced to accept less for properties to get the sale and prices will tumble.
Anthony Harris, of Continuum, a financial advice firm which manages more than £1.53bn in mortgages and other assets, told IFA News: “I am seeing more than 50% of purchase applications being down valued at present.”
This level is likely to rise further, he added. “Sellers are asking high prices and there always seems to be more than two buyers who are prepared to enter a bit of a bidding war, pushing up prices further. But the lenders’
surveyors are not supporting the prices agreed.”
He explained that when surveyors do not agree with the buyer and seller’s valuation of the property, the home is down valued. The prospective buyer must then pay the difference between the valuation and the agreed sales price in cash or risk the purchase collapsing.
In one example, Mr Harris said a couple buying their first home in Berkshire had to find an extra £30,000 in cash. They had agreed to pay £430,000 for their property but their lender valued the home at £400,000. Another family buying a house in West Sussex agreed to pay £470,000 but had to find a further £20,000 after their high street lender down valued the house.
Mr Harris is not alone in his views. Adrian Anderson, of Anderson Harris mortgage brokers, has warned: “I expect mortgage valuers will start to be more conservative moving forwards. The heat is coming out of the market and buyers are being a bit more restrained because of rising mortgage interest rates and the costof-living crisis.”
Emma Jones, broker and owner of Alder Rose Mortgage Services, told This is Money that around a fifth of her clients are now being told their property is worth less than the asking price.
“We have seen around twice as many down-valuations in the past few months as we were previously,” she said.
“It suggests lenders are being more cautious. And it is something we are seeing across the board and with holiday lets as well.”
“A down valuation can be a particularly large hit where applicants have been seeking a high loan-to-value mortgage – the lender will always base their loan on the lower figure,” warned Mr Harris.
“However, a down valuation certainly doesn’t have to mean the end of a deal. We generally find a solution, whether that be alternative financing or a renegotiation of price.”
Online Mortgage Adviser suggests, if
a surveyor has undervalued a property, the client generally has a few options:
● try to appeal the decision;
● renegotiate the price with the seller; or
● find extra cash to make up the shortfall.
But it also stresses: “None of these are guaranteed, which is why it’s often best to speak to a broker for additional support,” adding “At the very least, having an expert on side can take some of the pressure off and means the client won’t need to go through it alone.”
It also points out that this problem is affecting those remortgaging as well as those buying – something that can be harder to resolve if the client chooses not to use a mortgage adviser.
And the reality may not be as bad as people fear. Rising inflation and costs do mean house prices could fall, though it is “unlikely that house prices will crash”, according to property site Rightmove which is predicting that house prices could fall slightly towards the end of 2022, although it predicts that prices could still be 5% higher than they were at the end of 2021.
Obviously as a mortgage adviser, you would argue that consumers should turn to an expert for help in finding a mortgage at the right rate and at the right value.
Unbiased argues that a mortgage adviser should also:
● Explain the various mortgages available and the different types of deals.
● Advise you on how much you can afford to borrow.
● Have access to special mortgage deals that are not available on the open market.
● Help you prepare for your application to boost your chances of success.
● Be able to save you money overall by finding a mortgage with lower interest rates and fees.
It adds: “Remember that every unsuccessful mortgage application may harm the chances of success next time around, as each refusal will appear on the consumer’s credit record. Using a mortgage adviser will maximise their chances of being accepted first time.”●
Liz Booth is contributing editor of Mortgage Professional
Rising interest rates are changing so quickly that brokers are struggling to keep up with client expectations.
This worrying predicament was highlighted by mortgage and protection adviser, Jiten Varsani, who confirmed that many lenders have recently had multiple rate rises including, HSBC which has hiked its rates 13 times since the summer.
Mr Varsani, from London-based London Money Financial Services, said: “There are many challenges at present but rising interest rates would be the main concern. Many lenders have had multiple rate rises. One, in particular, is HSBC with 13 increases since the start of July.
“The pace at which providers are changing rates – it is hard to keep on top of client expectations when lenders give just a few hours of notice.”
The pace of change in mortgage rates is causing problems for mortgage brokers with clients who have unrealistic expectations, as Aamina Zafar reports
The increase in rates is especially hard for first-time-buyers (FTB) because it makes mortgages more expensive.
Jagdeep Bains, mortgage and protection consultant at Berkshirebased Sun Mortgage and Protection, said: “The FTB market now has to deal with an increase in rates. Their monthly payments will be higher than expected and clients will have to rethink their affordability and the actual cost of a larger mortgage, especially when putting down a deposit of 10% to 15%.”
Mortgage expert Ray Boulger has warned that the rise is also having a devastating impact on buy-to-let (BTL) investors who are coming to the end of a fixed term.
Mr Boulger, senior mortgage technical manager at John Charcol, said: “As BTL mortgages are generally interest only and as mortgage rates are more than double what they were a year ago, when landlords’ existing fixed rates expire in many cases their new monthly mortgage cost will more than double.
“Although mortgage costs are a legitimate business expense, the fact that only half of this cost can be deducted from the rental income by higher rate taxpayers if the property is owned in their own name means the increased interest cost is an additional burden which will push some landlords into a net loss after tax.”
The rise in interest rates is adding pressure on a housing market that had become accustom to historically low interest rates during recent years.
However, Mr Bains expects interest rates to eventually settle between 2.5% to 3.5% depending on a borrower’s loan to value (LTV). He added: “I do feel rates will continue to rise over the next 6 to 12 months while the economy is so fragile and inflation is so high. I do not feel rates will ever go back down to the historically low rates we have had in the last 8 years, but I do expect them to settle between
2.5% to 3.5% depending on your LTV equity.”
Uncertain times mean advisers are now seeing more applications that do not fit a lender's affordability calculator.
In fact, Mr Varsani noted that in December 2021, a client was able to borrow up to £370,000, but in June 2022, the same client was offered only £311,000 from the same lender despite their personal situation remaining unchanged over this period.
He added this means the role of an adviser has shifted from sourcing and securing a mortgage to now also managing client expectations.
He said: “The role of an adviser has evolved to more than just sourcing and securing a mortgage. It’s our job to manage client expectations and really highlight future changes to ensure the client is aware of what could happen in the future. We must have ‘sense check’ conversations with the client, and sometimes rein in budgets and expectations where applicable.”
This was also noted by mortgage expert Liz Syms, who urged advisers to rigorously check a customer's future affordability and be remain vigilant when considering short-term rates.
Ms Syms, chief executive officer at Essex-based Connect Mortgages and vice chair at Society of Mortgage Professionals, said: “The increasing rates and cost of living increases mean advisers have seen far more applications not fitting the lender's affordability calculators. As a responsible adviser, with more rate rises expected, advisers need to spend more time looking at customers' outgoings and assessing the impact on their customer's future affordability and be extra careful when considering short-term rates such as two-year fixes.
“Advisers can assist FTB customers with affordability issues to consider options such as Joint Borrower Sole Proprietor, or other schemes intended to assist with affordability.”
Ms Syms added that affordability is also an issue for BTLs owners.
She said: “For BTL, affordability is a challenge also. Where a property did not have enough rental income to fit the 5.5% stress rate, a five-year fixed rate was a good option for a better calculation method. With these rates now rising, affordability issues are rising. There are a number of options to consider. Higher rate taxpayers could purchase via a limited company to get a lower street test.
“Applicants could consider purchasing a higher-yielding property such as houses in multiple occupation. There are also a number of products from lenders that will allow other earned income to be used to make up the shortfall. Advisers should familiarise themselves with all these offerings to help in as many scenarios as possible.”
The BTL market was hit with another challenge in September, when some banks stopped offering BTL mortgages after landlords rushed to lock in cheaper rates and overloaded their systems.
However, mortgage expert Robert Dyson, said there is no longer the same panic to lock in cheaper rates as these are already significantly higher than they were earlier this year. As a result, mortgage applicants are now looking at shorter term options or penalty free trackers rather than tying themselves into fixed rates with substantial penalties given the current cost of borrowing.
Mr Dyson, mortgage adviser from Smethwick-based Intelligent Finance Planning, added: “Many clients are now looking at shorter term options or penalty free trackers rather than tying themselves into fixed rates with substantial penalties given the current cost of borrowing. If clients want the certainty that a fixed rate brings then that is the only option that will provide this but advisers are not just there to follow instructions, we also need to challenge the clients and make sure they have considered all the options available and are happy that a fixed rate is the right solution for them.”
With skyrocketing house prices, near-record inflation, unaffordable energy prices and higher interest rates, some homeowners could find themselves in a difficult position this winter as experts predict repossessions rise. This was confirmed by Mr Varsani, who said: “Sadly, with rising interest rates and the rising cost of living, increased repossessions could be unavoidable. It’s worth remembering there is ‘tightening your belt’ and then there’s what we are seeing now with increases across all aspects of monthly expenditure including from food to utilities to fuel.”
During times of financial difficulty, Ms Syms added that advice professionals must make sure that any recommendations do not artificially push problems down the line only to arise later on. She said: “Customers may seek guidance, such as remortgage options, when they are already in financial difficulty. Advisers need to make sure that any recommendations do not just push the problem down the line.
“For example, is it appropriate to use a second charge to consolidate existing unsecured debts, when this means the customer is potentially putting their home at risk, when perhaps seeking debt advice on how to manage the unsecured debt would be more appropriate?”●
Aamina Zafar is a freelance journalistDespite rising interest rates, accessing capital from the value of your home is an increasing trend set to continue, as Liz Booth reports
ore than 200 customers a day are choosing equity release to manage their finances as £1.6bn of property wealth is withdrawn in Q2 2022, according to the Equity Release Council.
MIts latest figures show homeowners aged 55+ took out 12,485 new equity release plans between April and June this year, equivalent to 205 new plans being agreed each working day.
The number of new plans agreed in Q2 increased 26% year-on-year when compared with the subdued market of Q2 2021 when pandemic restrictions remained in place but fell short of the
peak of 12,891 recorded in Q4 2018.
New and returning customers withdrew £1.6bn of property wealth, with new plans sizes largely stable at around £135,000 while returning drawdown customers typically withdrew £13,506 each.
More new customers opted for lump sum lifetime mortgages rather than drawdown lifetime mortgages for the first time in 13 years, since Q1 2009, increasing from 45% of new plans in Q2 2021 to 54% now.
David Burrowes, chair of the Equity Release Council, says: “The need to improve older people’s access to housing wealth was widely recognised by industry and policymakers long before the Covid-19 pandemic and current cost-of-living pressures emerged.
“The fact that hundreds of homeowners are now choosing to release equity each day, based on detailed financial and legal advice, is significant progress from the days when the market was considered an under-developed niche rather than the mainstream option it has become.
“Raising awareness of how modern equity release products work alongside other financial solutions is essential so people who are asset-rich, but cash-poor can benefit from the wealth they have built up through their lifetimes and also support those around them,” he says.
Mr Burrowes believes that the recent trend towards lump sum products is likely to be influenced by customers’ continuing desire to gift money to younger family members and share their property wealth across generations, particularly as the costof-living pressures in the UK increase.
He adds: “By making penalty-free partial loan repayments last year, customers reduced their future interest costs by tens of millions of pounds.
“The flexibility to make voluntary repayments, with no risk of repossession if they can’t afford to, is likely to be important to a growing number of people as they look to balance their books. The reality
that interest rates have risen from historic lows will also impact people’s plans and the Council will monitor this closely as the year progresses.”
Mr Burrowes concludes that in every instance of equity release, expert advice and careful consideration are essential.
The council figures are backed by new numbers from Canada Life which show 50% of applications in H1 were from customers looking to clear their existing mortgage, the most common reason given for releasing some or all of the equity. This was followed by raising money to pay for home improvements (38%) and supporting day-to-day living costs (20%).
current cost of living crisis. Despite this, customers are also still keen to make home improvements, go on holidays and gift to friends and family.”
Mortgage broker Henry Dannell has done some further research which reveals that the average homeowner using equity release can supplement their income by a fifth or boost their pension pot by as much as 181%.
It said those over 55 are releasing an average £111,511, which with the average life expectancy, means a boost of £4,130 a year over 27 years.
Gifting to family or friends was also a popular reason, with 15% choosing to release equity for this purpose. Customers also continued to use equity release to make substantial one-off purchases such as booking a holiday (14%), buying a new property (12%), or buying a car (10%).
Alice Watson, head of marketing, insurance at Canada Life, said: “Surging inflation and a rising cost of living is understandably encouraging many people to take stock of their wealth and where it sits. Understanding the reasons why customers seek to release equity from their homes can provide an interesting snapshot into the lifestyles and needs of our customers.
“From the first six months of the year we can see that the desire to clear an existing mortgage is a strong driver to pursuing equity release. We then can’t ignore the significant proportion of people turning to equity release to cover their daily living expenses, the demand likely being driven by the
With those aged 55-59 earning an average net income of £26,483, this additional £4,130 a year equates to a 16% increase in their annual level of income. Those aged 60 and above earn an average annual net income of £20,787, meaning that equity release can help supplement their earnings to the tune of 20% per year.
The average Baby Boomer has a private pension pot of £61,546, which they can usually start to draw from once they reach 55. Supplementing this nest egg with the average level of equity release (£111,511) would bring about a 181% increase in the total value of this pension pot.
Those solely reliant on a government state pension would receive a total of £144,417 in annual instalments of £9,628 between the current retirement age of 67 and the average life expectancy of 82. Adding £111,511 via a Later Life mortgage would increase this by 77%.
For those benefiting from both a private pension pot and a state pension (£205,963), the average level of equity release would still supplement their pension pot with a notable 54% increase, bringing it up to £317,474.
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Liz Booth is contributing editor of Mortgage Professional