Welcome to TLT's busy lender's monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.
The UK is due to implement the majority of the Mortgage Credit Directive on 21 March 2016. One of the less heralded changes that will be swept in by the Directive is the requirement for brokers to provide clients with details of their commissions across all of the products available (not just on the product for which the borrower has applied).
This means that brokers may need to provide borrowers with information regarding their fees in relation to every product on offer.
The objective is to provide increased transparency around the payments that brokers will receive from lenders, to provide borrowers with more information in order to select a mortgage product.
Whilst brokers will only be required to provide this information to borrowers if it is specifically requested, they will be under an obligation to let borrowers know that a request can be made.
Mortgage approvals for both house purchases and remortgages peaked at the highest level for 14 months in April 2015.
Figures released by the Bank of England showed the number of loan and remortgage approvals for April as 68,076 and 35,930 respectively, compared to averages of 60,679 and 32,308 over the previous six months.
The continued increase in lending came despite expectations that borrowers and lenders would wait until after the election to act. Instead borrowers continued to take advantage of the low interest rates that remained available from lenders.
A survey for the Building Societies Association (BSA) has revealed that almost half of 25-34 year olds expect their mortgages to last into retirement.
Paul Broadhead, head of mortgage policy at the BSA, cautioned against reading too much into this: "We are all now living much longer and getting on to the property ladder later in life. Many younger buyers are realising that they may not be able to pay off their mortgage until after they retire." Mr Broadhead advised that the government, regulators and financial services sector needed to adapt to reflect that "paying off a mortgage by the age of 65 is no longer a reality for many."
Research by retirement income specialist, Age Partnership, also showed that the use of equity release to pay off interest-only mortgages has tripled since the Mortgage Market Review (MMR) affordability measures were introduced in April 2014.
Figures from the Financial Conduct Authority show that around 600,000 interest-only mortgages are due to reach the end of their term by 2020 and that half of those borrowers have no means to pay back the mortgage debt.
Commentators have highlighted how the MMR measures are preventing borrowers remortgaging, leading them to turn to equity release as a solution to the mortgage debt.
Continuing low interest rates and increasing confidence in the property market has seen an increased demand for lending. Lenders are also offering a wider range of products to meet demand from customers to meet their individual circumstances. Some of the new products launched recently are detailed below.
Kensington Mortgages and Ipswich Building Society have both launched new products for self-employed borrowers. Kensington's products will take into account a company director's share of net profits in addition to salary. Kensington's own research amongst mortgage brokers shows 37% of self-employed people struggle to prove their income compared to just 3% of employed customers.
Newcastle Building Society are targeting the new build market, with four new products launched allowing up to 90% loan to value being available. The products are fee-free. Steve Urwin, Managing Director of Sales and Marketing stated that "The launch of specific products for the new build market help will continue to support first time buyers and next time buyers in a market that is expected to expand in the next couple of years."
Following the acquisition of specialist equity release provider Newlife in April 2015, Legal & General has also launched its own range of lifetime mortgage products. With over 60s owning nearly £1.3 trillion of housing equity and growing life expectancy, the cost of care and rising property values, this is an area that is expected to experience significant growth.
On 8 June 2015 the House of Commons library published a Briefing Paper detailing the mis-selling of endowment mortgages from the mid 1980's onwards.
Briefing Papers are published to assist MPs with their work by providing impartial information and evidence based reports. The reason for this particular Paper is given as 'primarily historical interest' and the figures contained in it relate to the early to mid 2000s.
The Paper also contextualises the wave of compensation claims in respect of endowment mortgages in light of the FSA review in the late 90's and early 00's. Endowment policies were, from the mid 1980s, the mortgage repayment vehicle favoured by borrowers. Their subsequent fall from grace has resulted in one of the most notorious mis-selling scandals in recent times.
Historically, these policies had generated large returns enabling borrowers to discharge their mortgage debt entirely, with any surplus available as a lump sum. Inflation had however peaked by the mid 1970s meaning returns on endowment policies also reached a high point. Thereafter the inflation rate steadily dropped throughout the 1980's and onwards, with the returns on endowment policies dropping proportionately and catching out many who had invested in them.
The Briefing Paper notes serious shortcomings in the policies which only became apparent in the late 90s. Some, it states, never stood a realistic chance of producing returns large enough to fully discharge mortgages, let alone provide a lump sum to the borrower. The Paper notes that the risk involved with these policies was never appropriately explained and that borrowers should not have been actively encouraged to take them out.
The Financial Services Authority undertook an investigation into mis-sold policies. They uncovered poor selling practices and warned that standards needed to 'markedly improve.' Following that, policy holders were required to be provided with a recalculation of their policy's estimated performance. This resulted in compensation claims, some of which are still ongoing.
A further result of the endowment mis-selling episode has been the industrial scale of regulatory investigations and reviews which shows no signs of abating.
In 2013, Northern Ireland had the highest level of negative equity in the UK with 41% of homeowners being affected.
It is estimated that since 2013 there has been an increase of 24% in mortgage shortfall debt - the deficit in a mortgage after a home has been sold or repossessed. Debt Action NI, a local charity, estimates that the total debt has risen to £44 million across Northern Ireland with the average debt per borrower being £100,000. It is predicted that the situation could deteriorate if interest rates increase.
68% of borrowers who contacted Debt Action NI warned that they would not be able to maintain payments if there was any rise in interest rates. The charity describes the situation as 'a ticking economic and social time bomb which we all need to be aware of'.
During the first three months of 2015 alone, 351 houses were repossessed by lenders. In addition, more than 200 investment or buy-to-let properties were also repossessed. Banks initiated action against 2,788 homeowners struggling with arrears with more than 1,000 cases reaching conclusion and repossession orders being granted in relation some 468 homes.
In Northern Ireland, The Royal Institute of Chartered Surveyors predicts that house prices will rise faster than elsewhere in the UK over the coming months with an increase of 4%, a view echoed by 43% of surveyors. A lack of homes coming onto the market has been noted.
From 6 July 2015, the amount homeowners struggling to meet their contractual monthly instalments are able to claim under the Support for Mortgage Interest (SMI) scheme will fall. Under the present scheme, homeowners entitled to SMI can get assistance with their monthly payments on a mortgage worth up to £200,000 based on an interest rate of 3.63%. This payment is to cover the interest element of monthly payments, but not the capital they have borrowed.
From 6 July 2015, the Government will be cutting the interest rate to 3.12%. This reflects a drop in the official Average Mortgage Rate in April 2015. In real terms this means that, for example, on a £100,000 mortgage over a 25 year term, the amount that can be claimed each month will fall from £303 to £260.
A DWP spokesperson said: "It makes sense that the mortgage interest support we pay is tied to the Bank of England's Average Mortgage Rate and that it should change as that rate changes."
SMI is a means tested benefit that can be claimed by people receiving income-based jobseekers allowance, employment and support allowance and pension credit. It is currently claimed by approximately 161,000 people.
Discounts on sale prices have fallen to a five-year low as demand continues to outstrip supply. Low interest rates and a rejuvenated economy have put properties within the reach of an increased number of buyers.
The market surged again following the election, with asking prices in London increasing by 17% now that concern over Labour's proposed Mansion Tax has blown over.
The average property is now listing at 93.95% of its initial asking price, the highest level since 2010. However, notwithstanding the meager reductions on offer, almost a third of all homes are currently listed below their original asking price, indicating that an appetite for negotiation remains.
The lowest reductions are evidenced in New Milton (4.78%), Milton Keynes (4.99%) and Northampton (5.03%) In contrast, significantly larger discounts have been recorded in Blackpool (9.8%) and Rotherham (7.4%).
This extended period of rising prices may be here to stay as interest rates remain low, despite the Bank of England indicating an intention to increase rates in due course.
Robust pricing has led to fears that housing is becoming less and less affordable, particularly for first-time buyers who have missed out on the boom. The impact of the Help-to-Buy mortgage guarantee and the Help-to-Buy ISA remain to be seen.
The Financial Conduct Authority (FCA) is seeking feedback from a discussion paper published on 25 June, 'Smarter Consumer Communication', on how firms can communicate more effectively with consumers. There is a focus on innovation.
There has been criticism that firms do not do enough to make use of modern technology and trends to reach out to consumers whom the FCA feels often struggle to understand written material. The view taken by the FCA is that better communication will improve consumer understanding of products and services thus bringing about more informed decisions, and in turn improve competition.
The FCA has given some examples of how firms can better engage with consumers;
We will report in a future edition of the Round-up the outcome of this discussion exercise.
Previous issues of the Round-Up have looked at technology and internet banking security, including the use of fingerprints (February 2015) and using customer heartbeats (March 2015) as part of the identification process.
The increase in technological advances is reflective of the increased use of mobile banking apps, whilst more traditional banking methods have become less common. The British Bankers' Association (BBA) reports that the use of bank branches fell by 6% over the last year. Call centre traffic is also on the decrease, with falls of approximately 14% over the last two years.
The BBA has also published research suggesting that customers will check their current account balances on mobile devices 895 million times in 2015, compared to an estimated 705 million checks in branches.
Lloyds Banking Group is also piloting a system amongst 1,700 of its staff whereby cheques are processed digitally. This allows for a photograph of a cheque to be taken on a smartphone and the cheque amount paid directly into a bank account. If the pilot is successful, Lloyds expect to roll out a fuller trial in the autumn and join Barclays in offering mobile cheque payments.
New to the market Atom Bank (which obtained a full banking licence from the Bank of England this month) is targeting technology as its USP, promising "a pioneering digital experience" with mobile app-based products and services. Atom's director of customer experience Stewart Bromley said: "Atom Bank’s model, built on its partnership with FIS, is the next step forward from thin skim fintech apps that have been filling the void before the arrival of the truly digital banks."
Bridging finance has increased by 35% since last April, in contrast with mainstream lending which decreased by around 4%.
Gross bridging loans exceeded £2.7 billion in the last 12 months, defying the expectation that uncertainty in an election year would depress the market.
The first four months of 2015 have already seen bridging loans in excess of £1 billion advanced to developers, signaling an active year for short term financiers. In addition, total lending has risen month on month, providing evidence that the market is gathering pace as we head towards the half year mark.
Commentators anticipate that the £3 billion mark is achievable this year, an increase of around 30% when compared with last year. Lenders' willingness to drop their rates to competitive levels in order to get deals done has significantly contributed to the increased sums lent.
The Land and Buildings Transaction Tax was introduced in Scotland on 1 April 2015 to replace Stamp Duty Land Tax.
Prior to its introduction the Scottish market was a flurry of activity as high-end buyers rushed to complete expensive purchases under the previous tax regime. In March this year 83 properties worth £1 million or more were sold compared to a typical 12 per month. This caused an impressive 9.4% increase in average Scottish house prices during that month.
No properties were sold for more than £1 million in April 2015. As a result of this "high-end freeze" average prices in Scotland fell by 1.6% (£3,000) to £184,970. This is the largest monthly fall since March 2009 according to the Your Move/Acadata House Price Index for April.
According to Christine Campbell, managing director of Your Move, the "high-end freeze" also cooled annual growth dropping from 16.3% in March to 14.6% in April.
A number of areas in Scotland have however withstood the disruption of the new tax regime. Orkney, Western Isles and Shetland saw the highest increases in prices during April.
Property values also reached a new high in the Scottish Borders, Highlands and West Dunbartonshire. With prices in Edinburgh and Glasgow also having increased compared to April last year.
Overall, the Scottish housing market is bucking the UK trend as sales during March and April have grown on 2014. This is compared to England and Wales where sales have been consistently falling behind the previous year for the last six months.
As the majority of Scottish buyers will benefit from the lower tax costs (those purchasing property for under £254,000) the momentum of the market should continue during the summer months, even if average house prices are held back in the short-term by the high end freeze.
There has been an increase in cash purchases of homes in Scotland. New figures reveal that the proportion of house sales in Scotland that did not require any borrowed money has increased by 16.5% over the past ten years. According to Registers of Scotland some 33,227 homes were money purchases in 2014/15, an increase of 5,682 since 2005/06.
There have been exponential increases in some areas including Sutherland, Kirkcudbright and Wigtown, Argyll and Bute, and Glasgow - from 57% to 75% in the last ten years.
Experts suggest that the surge is in a large part due to last-time buyers seeking to downsize to a smaller, more practical home in order to help support their retirement funds.
This generation of downsizers have generally benefitted from the sharp rise in house prices in prime areas over the past decade in terms of available equity.
A group of MPs last year suggested a "help to move" package of incentives to encourage older people to downsize and free up family size homes for younger families. This is thought to be a win-win solution for both groups.
At the other end of the market, research by Clydesdale Bank revealed that 63% of first time buyers in Scotland are now seeking a house rather than a flat. Steve Fletcher, director of retail banking of Clydesdale Bank stated that research has "underlined the changing expectations of first time buyers and a combination of factors such as people entering the property market at an older age and homeowners staying in their home for a longer length of time is having an impact on the preferred type of home for first time buyers."