Is Specialist the New Normal?

As the owner of a Network working predominantly in the Specialist market, it is easy to perceive that almost everyone needs a specialist mortgage, in fact, it is often a surprise when we get a ‘vanilla’ mortgage enquiry.

However, there are many advisers and Networks for whom advising on specialist is not the norm. Specialist mortgages for these types of advisers are often no more than 25% of their business and that includes Buy to let.

But are these advisers missing out on a much bigger opportunity?

IMLA’S Mortgage tracker Q4 2016 revealed that a massive 61% of all mortgage applications made in the UK, do not result in funding.

Together commissioned their own results to understand why. Together’s research showed that 64% of those were rejected due to ‘non-standard reasons’. These reasons included:

29% – Too much debt or income not sufficient
18% – Low credit score
12% – Employment type
10% – Property type
9% – Insufficient deposit
6% – To near to retirement

Millennials aged 18-34 were particularly hard hit due to the way they currently live and work. Rejection due to nearing retirement age could be an increasing problem according to Age UK who
predict the number of people aged 65 and over are expected to increase by 65% by 2033.

Interestingly, Together confirmed that of the respondents they surveyed, they would have actually lent to 66% of them. However, the research also found that a significant percentage of the rejected respondents were actually put off of trying again elsewhere. IMLA’S latest report Q3 2018, shows a drop to 52% of mortgage applications that have not resulted in funding. I suspect this is due to the increased number of ‘specialist’ lenders that have entered the mortgage market over the last couple of years, however, there is clearly more work to be done to
increase awareness of these products.

If some applicants could have got funding elsewhere, but have been put off applying again, there is certainly a need to educate the consumer market further with the wider options available from the specialist lending market. Equally however, as over 70% of the mortgage market is intermediated, there is an even greater need to ensure that all advisers in the market are aware of the specialist options available for their clients.

More of the mainstream lenders are looking at automation and ‘robo-advice’ as a way to considerably improve the journey for consumers. Initiatives such as open banking and providers such as Castlight are helping lenders to digitalise and streamline the process meaning in the not too distance future, clients will not have to provide the level of documents they do today. This is definitely a good thing for all the clients who tick the boxes as ‘mainstream’, but what about the rest?

We are already aware of issues with AVMs, for example, being unable to correctly predict the value of a non-standard property, such as multiple flats on a single freehold title. The income for the self-employed could also be difficult to review accurately without manual intervention. Even reviewing documents such as the tax calculations and overview documents of a client is not straight forward. What if they have carried forward losses? The self-employed income they have earned that year would not then show on the document. What if they are a Director, but have chosen not to draw a Dividend, how will the lenders reflect retained profit in the automation process of affordability?

One of the clear benefits of the specialist market is the ability to manually underwrite a complex scenario. It is very common for a client to have more that one complexity to their circumstances that needs to be reviewed by a lender. For example, you may have a client looking to purchase an ex-local authority flat, at an auction, with a low credit score and has only been self-employed for 1 year! Where will you go with that?

As more specialist lenders enter the market and will consider scenarios such as the above, how will brokers know which of them to turn to for their clients? Sourcing systems traditionally have not been detailed enough in their criteria, but new tools such as Knowledge Bank and Legal and Generals Smartrcriteria make it far easier for brokers entering this market to understand who may be able to help their clients. This also gives brokers the ability to future proof their own businesses against the digital threats.

 

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