Richard Howes: The end of the specialist mortgage?
Richard Howes has worked in the intermediary market for over 35 years holding sales management roles with leading insurance companies as well as senior positions with James Hay, Cater Allen, and Santander for Intermediaries. As Managing Director of Paradigm Mortgage Services he is driving growth, building on the strength of existing partnerships with member firms and strategic partners and suppliers, and helping expand the Paradigm proposition to benefit all stakeholders.
Paradigm Mortgages is one of the leading Mortgage Clubs in the UK offering one of the widest choices of lenders and their unique and unconditional proc fee rebate proposition.
The End of the Specialist Mortgage
When I joined Paradigm around five years ago, my experience of the mortgage market had been predominantly mainstream. Consequently, one of the areas I was particularly keen to understand better was specialist mortgage lending. What became increasingly apparent was how relevant specialist lending was becoming to a much wider range of borrowers in a post-pandemic economy.
Five years later, I increasingly wonder whether the word ‘specialist’ accurately describes the market at all.
Specialist borrowing is changing
Around 35% of lending completed through Paradigm is now what we would describe as specialist. Importantly, that doesn’t simply mean heavily credit-impaired borrowers or debt consolidation. It includes self-employed customers, people with multiple sources of income, expats, foreign nationals and borrowers whose circumstances simply do not fit neatly into the traditional mainstream lending model.
This feels increasingly important, because the way people work and manage their finances has changed significantly.
Employment is less linear than it once was. People move jobs more frequently, combine employed income with other earnings and increasingly have side hustles. Self-employment remains a major part of the economy and younger generations appear considerably more comfortable with both changing employment regularly and carrying debt for longer periods.
Against that backdrop, the idea of a straightforward borrower with a job for life, one employer, one income and a mortgage they intend to repay over exactly 25 years looks rather less universal than it once did. The borrowers might therefore be labelled specialist, but their circumstances are becoming increasingly normal.
Why specialist lenders have gained ground
One of the strengths of specialist lenders has been their ability to understand those circumstances rather than simply identify whether somebody falls inside or outside a particular box. Self-employment is a good example. There may have been a difficult year or a temporary blip within a business. A specialist lender can look beyond that, understand why it happened, establish what has happened since and decide whether there is a good customer and a sustainable mortgage underneath the numbers.
That doesn’t mean abandoning sensible risk decisions. Quite the opposite. The growth of specialist lending has been accompanied by stronger governance, better credit processes, more competitive pricing and increasingly sophisticated propositions.
We have seen similar changes in bridging and second charge mortgages. Adviser understanding and acceptance of those products has improved, lenders have invested considerably in their propositions, and more established institutions have entered the sectors. As a result, advisers who might previously have been cautious about these markets are increasingly prepared to investigate them.
Once brokers become comfortable with a new area, experience suggests they tend to commit to it. They may carry out considerable due diligence before entering, but when they recognise that a product can deliver a good outcome for their clients, it becomes another legitimate and more frequently used part of their toolkit.
A commercial opportunity for brokers
There is another reason why I believe advisers should be looking seriously at specialist lending.
The mainstream mortgage market is becoming increasingly competitive for smaller and regional advice firms to differentiate themselves within. The large lenders have, as we know, marketing capabilities and product transfer strategies that enable them to more than compete if required with the introducing broker customer relationship. Factor in AI and its potential, and this area will potentially get more and more “squeezed”.
What advisers can do, however, is demonstrate value where a client’s circumstances require more thought, knowledge and judgement. Specialist lending therefore gives firms another string to their bow. It creates opportunities to solve problems which cannot necessarily be solved simply by identifying the cheapest product on a sourcing system. In doing so, it can also help advisers create stronger and longer-lasting client relationships.
The mainstream market has clearly noticed what is happening. We are already seeing large lenders becoming more flexible around credit scoring and criteria and being more willing to consider good applications outside standard policy.
I expect that convergence to continue and see it as a positive move. More competition in this area should mean more competitive pricing and propositions. It’s great that Specialist lenders are pushing mainstream lenders to become more flexible, while mainstream lenders are inevitably looking at where specialist lenders are successfully finding new customers.
Where does AI fit?
It would be difficult to consider the future of any part of financial services without mentioning AI.
There are obvious applications. Technology should be capable of removing repetitive administration, moving information between systems, analysing documents and taking a considerable amount of the heavy lifting out of a mortgage application. Where I become more cautious is if we start equating automation and speed with better advice or better lending decisions.
Years ago, I remember a very successful broker telling me that within perhaps 30 seconds of meeting someone he knew which lender their mortgage would go to. At the time I thought that sounded impressive.
Today, I might ask the opposite question: how can you possibly know enough about somebody in 30 seconds?
A mortgage is one of the largest financial commitments most customers will ever make. An adviser should understand not simply their income today but their wider circumstances, objectives and what might happen if those circumstances change. The same principle applies to underwriting.
The very reason a borrower approaches a specialist lender is often because something about their situation requires understanding. If we simply feed that customer into another algorithm and allow a machine to make the decision, we risk removing precisely the thing that differentiates specialist lending.
AI should therefore work alongside advisers and underwriters rather than replace them. Let technology deal with administration and information. Let people use the time that creates to make better decisions. “You don’t need Chips with everything!”
Where does the market go next?
I can only see the specialist market continuing to grow.
Borrowers are changing, attitudes towards debt are changing and mortgage terms and repayment structures will have to become increasingly flexible. We are already seeing renewed conversations around interest-only lending and longer mortgage terms which would have been viewed very differently only a few years ago. It’s interesting in their response to the FCA’s paper CP 26/18 that IMLA call for lenders and intermediaries to do more to advertise their services and seek to assure prospective borrowers that there may be options available to them in the impaired credit sector, further emphasising the importance of this area.
For brokers, the direction of travel looks increasingly clear. The more complicated customers become, the greater the value of good advice.
Today’s ‘specialist’ borrower will increasingly represent tomorrow’s typical borrower and before too long specialist mortgage lending will simply be mortgage lending.