The risk agenda is evolving and we should respond

Priorities in the mortgage market are shifting in some interesting ways

The risk agenda is evolving and we should respond

The following article is provided by Stuart Miller of Newcastle Building Society.

I had an interesting conversation with one of our broker partners recently, who observed how priorities in the mortgage market were shifting in some interesting ways. 

Three months ago, he told me, the biggest challenges for him were transactions falling through and long delays to get from offer acceptance to completion. Today, affordability is his biggest concern. It means, of course, that service remains paramount. Getting a decision quickly is as important to secure pricing as it is in supporting entire chains of transactions.  

Pricing, and securing the best deals for clients, is arguably more important now than ever as we emerge from an era of historic low interest rates into an age of less than rosy economic data. Figures coming out of the Office for National Statistics and Bank of England paint a very different picture for 2022.

At the beginning of May, the Bank of England raised the base rate again, bringing it up from 0.75% to 1% – a 13-year high. Consumer price inflation hit 9% in April, meaning household costs are now rising at their fastest rate in 30 years. 

You do not need me to tell you that energy and fuel costs are the biggest contributor. The prices at the pumps (when they are not run dry) are eye watering. When the energy cap increased from April 01, around 18 million households on standard tariffs saw their annual bill skyrocket. 

Mortgage rates have inevitably risen, with early May data from Moneyfacts recording the average standard variable rate at 4.78%, up from 4.59% this time last year. This number is likely to rise again to factor in the Bank’s latest hike. Product rates are also climbing.  

But there have also been a few developments that are likely to have a meaningful impact on various borrowers applying for the first time or for a remortgage.  

Firstly, one high-street lender announced changes to its affordability calculations that came into force in April. Now, affordability specifically factors in rising energy bills and household expenditure as well as the increase in both National Insurance and dividend income tax rates. 

On one level, this is prudent. Lenders rightly have a responsibility to ensure borrowers are not overstretched. This can be challenging given we all suspect that borrower affordability is likely to continue to be squeezed considerably over the coming months.

For those running their own businesses or with complex income, this may become an issue of even bigger proportions. Import costs are higher, wage demand is higher, and companies also face soaring energy bills and higher taxes.

Given income assessments for these borrowers are already conservative compared to those paid through PAYE, it’s likely to become a slice of the market more in need of brokers’ help than ever.  

Another announcement in the past month also resonated with me. Buy-now-pay-later has exploded over the past year and, in April, one of the largest players confirmed it will submit consumer data to credit rating agencies, revealing debts that have previously been invisible to lenders.  

Not only that, but this lender will flag where applicants have failed to keep up with repayments. For first-time buyers, among whom buy-now-pay-later is particularly popular, this could prove an unexpected drag on their ability to secure a mortgage approval.  

Thirdly, another high-street lender announced tighter affordability limits where borrowers have other outstanding debts. This isn’t an unusual approach to underwriting across the market, but it is a shift for one of the market’s largest lenders.  

Stepping back for one moment and examining the announcements of the last month, one can perceive a real list of challenges facing borrowers this year - but it’s not all negative. When the market is trickier to navigate, mortgage advice becomes even more valuable. Providing good advice to customers in particularly complex situations is worth its weight in gold to borrowers; it can mean the difference between saving thousands of pounds or in some cases avoiding getting into financial difficulty.  

Knowing where to get support for complex cases is more than half the battle, and it’s precisely where manual case-by-case underwriting comes into its own. Algorithms are superb for processing high volumes, but they tend to specialise in underwriting relatively inflexible criteria. Often a bit of common sense, experience and judgement is needed, now more than ever. 

Therefore, service remains key, because securing deals will be important in a new era of rising base rates. However, supporting brokers with criteria that helps and pragmatic underwriting approaches are also going to be increasingly important as risk appetites fluctuate. We continue to do everything we can to do just this.