News Review: Specialist Prime
Disenfranchised Prime the new buzz word by
Doug Hall, director, 3mc
the mortgage industry has never been afraid to create new terms to describe what it does. the ‘90s and 2000’s gave rise to a whole new raft of mortgage jargon with terms such as sub-prime and securitisation becoming common parlance, even amongst those who don’t work in the mortgage industry - for all the wrong reasons. as we move into the post-credit crunch world, i thought it was high time we had a new term to conjure with, so i’m going to start with ‘disenfranchised prime’. the google dictionary defines
‘disenfranchised’
as depriving someone of their power, privileges and rights; marginalising them. i suggest this is a very good description of an increasingly large number of prime borrowers who are perfectly creditworthy and have not changed their status or financial circumstances in recent years, but who have nonetheless been marginalised by mainstream lenders. Let me emphasise the
word ‘prime’. i’m not talking about sub-prime or even near prime borrowers; i’m talking about borrowers whose credit records are and always have been squeaky-clean. these are borrowers for
whom the credit assessment bar - which usually takes the form of a credit score - has simply been raised too high.
Computer says no all too frequently they find the answer to their loan request is ‘no’, despite them having managed their finances prudently in the past. i’m sure most mortgage brokers can give examples of clients who fit into my ‘disenfranchised prime’ category and i regret to say that as time ticks by more and more borrowers will join their ranks. Why? Because when interest rates rise, as they will do eventually, and as borrowers come to the end of fixed rate deals which they took out two or three years ago, they will discover that remortgaging onto better deals is not as easy as they thought it was going to be. and for some, it will prove to be impossible. the same will be true of home movers. even down sizing to reduce outgoings will be difficult for the disenfranchised.
Monochrome market unfortunately, with more than 90% of all new mortgages being provided by just six lenders, there is little impetus for change. Between them, these lenders are effectively (and, i suspect, uncomfortably) in control of the market and set the terms on which mortgages are made available. the end result is a monochrome mortgage market (ah, another new term!) in which all deals are very similar. For those borrowers who conform to the big six lender’s criteria then there is a modicum of choice; for everyone else the choice is far more limited. However, it’s not just
existing borrowers who are being disenfranchised; it’s
6 mortgage introducer NOVEMBER 2010
also first time buyers. grant Shapps, the Housing minister, continues to refer to the ‘age of aspiration’ and in a recent speech said that ‘this country is in danger of letting down the aspirations of yet another generation if homes do not become more affordable in the long term”. He concluded by saying: “We can’t afford to have another boom that will lock another generation out of the housing market.”
Managing aspirations i agree, we certainly don’t want another boom. most of us would be happy with a normally functioning market; but the sixty four million dollar question is how are we going to avoid letting down a generation of first time buyers? unfortunately, new housing starts are at their lowest level for almost a century and we are woefully short of achieving the previous government’s target of building 250,000 new homes a year, if an acute housing shortage is to be avoided. the construction sector is on its knees and the mortgage market continues to force first time buyers to rely on the bank of mum and dad in order to realise their dreams.
Life blood First time buyers are therefore another class of ‘disenfranchised
struggling, the effects will be felt elsewhere. Which explains why the
private rental market is doing so well, with both demand and rents continuing to rise. Buy-to-let is one of the few healthy sectors of the housing market and, according to a survey recently carried out by Paragon, now accounts for nearly one in five mortgages handled by intermediaries. With the traditional savings market struggling to offer returns which beat inflation, buy-to-let is, once again, looking like a sensible option for investors who are willing to take a longer-term view, with rental yields of more than 8% being achieved in places such as newcastle which has a big student population. So, surely buy-to-let does
prime’
borrowers. they’ve done nothing wrong and are prime borrowers with clean credit records, yet thousands cannot get mortgages which meet their needs. and, as we all know, first time buyers are the lifeblood of the housing market and if they’re
not fall into my newly created class of ‘disenfranchised prime’ borrowers? Well, i’m afraid that a number of landlords would say that it does, because despite having a clean credit record and an excellent track record of profitable trading over many years, they simply cannot access sufficient funds to satisfy their future requirements. many have hit their credit limit with existing lenders and are struggling to fund further deals. the good news (yes, there is some good news out there) is that the buy-to-let market is recovering. investors looking for a 75% LtV buy-to-let mortgage now have a choice of 99 products, up from 65 in october and there are even 12 deals available at the 80% LtV level, which is a marked turnaround from this time last year.
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