As we start the New Year the lending arena is already slightly different again, with the withdrawal of the Funding for Lending Scheme. Will we really notice any difference as a result though or is the market already strong enough to take it?
The big banks used FLS but didn’t really need it and mostly appeared to use the funds to rebuild their balance sheets. It was a different story for the smaller lenders however, many of which relied on the access to cheaper funding in order to offer competitive mortgage rates.
As the only other source of mortgage funds for most of these lenders is the savings money that they can bring in, the question is now: Will they have enough savings to sustain their lending or will they need to look to a different model, maybe one that involves securitisation?
At the end of 2013 we saw some pretty aggressive pricing as lenders went all out to hit their targets, so it will be interesting to see what the strategy is as we kick off the New Year. There are a number of elements that this could affect.
The biggest effect we might notice may well be pricing, as the withdrawal of cheap funds could increase the mortgage interest rates charged by the smaller banks and building societies. Where lenders source their funding from will have a very real impact on their pricing.
Another thing that could be impacted is criteria, so brokers should look out for potential changes, as if some lenders need to reduce their lending due to affordability, then their criteria may well become more strict – and all at a time when the MMR will also make things more challenging and demands that lenders need to be more transparent.
We could also see some lenders review what sectors of the market they are in, if funding is limited they could well opt to focus just on one or two areas such as buy-to-let or just the prime market.
Finally there could be a review of the distribution strategy, as with limited funds to lend it may be prudent to also limit distribution and many lenders say that they find it easier to control the quality and the amount of business they do by focusing on limited distribution through certain networks or mortgage clubs.
A much wider knock on effect could be on the levels of service we see from all lenders, as with the FLS withdrawal on top of the introduction of the MMR, Help to Buy 2 and the new consumer credit rules, lenders are being stretched to the max at the moment.
The big question is whether this will affect the overall size of the market. Only time will tell whether the market is strong enough to stand on its own two feet or whether this move will cripple the smaller lenders.
A positive in all of this could be a rise in savings rates as smaller lenders go all out to attract in savers’ money. The most important element in this transition going smoothly will be lenders’ communication with the broker market. People forgive a lot more if they understand what is going on, the changes that are being made and the reasons for it.
Despite growing borrower demand, or even because of it, it will continue to be a challenging time in 2014, it’s just that the challenges will be different. However we are all here for the same reason – to provide a service to the borrower. Understanding the challenges and working together to overcome them will be key to the growth of the market this year.
Karen Hedges is mortgage manager for First Complete and TMA