Welcome to TLT’s busy lenders’ monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
The new pre-action protocol for debt claims has now been published and comes into effect on 1 October 2017.
The protocol requires a letter of claim to be sent to the debtor before proceedings are issued, providing details of the debt and stating that a copy of the agreement giving rise to the debt can be requested. An information sheet needs to accompany the letter signposting debtors to where they can get free and impartial debt advice and providing information on the process. Finally, a response from is to be included with the letter.
If the debtor does not respond to the letter of claim within 30 days then debt recovery proceedings may be commenced.
The debtor may use the response form to request disclosure of further documentation from the creditor, request time to take legal advice or deny the debt. If the parties cannot agree about the repayment of the debt they are encouraged to use alternative dispute resolution. However, if an agreement cannot be reached within 30 days of disclosure of any documents requested by the debtor or 30 days after the response form (whichever is later) the creditor will be able to start a claim.
Lenders engaged in debt recovery work now have a period of six months to implement the changes required by the protocol. TLT can advise further, if required.
The Right to Buy scheme, brought in during the eighties, enables council tenants to buy their council house, often at a discounted price. The discount, repayable in certain circumstances, is secured by a charge against the property.
The Welsh Assembly states it lost more than 139,000 homes from its housing stock to the scheme between 1981 and 2016, the high point being 2003 – 2004 when 7,000 homes were sold. More recently, during 2012 – 2016 an average of 248 homes per year were sold under the scheme. The Welsh Assembly has commented that this reduction is due to economic factors, including tighter mortgage lending. Nevertheless the Assembly is concerned that the continued reduction in housing stock affects its ability to provide housing assistance.
The Scottish Parliament has already removed the right to buy in Scotland. Following this lead, on 13 March 2017 the Welsh Assembly introduced a bill to also end the right to buy in Wales.
A consultation on the bill is due to expire on 9 April 2017. We will provide further updates on the progress of the bill in due course.
A report published last month by Prudential comments that 25% of people retiring in 2017 will have debts (including mortgages).
Spotting a marketing opportunity, Shawbrook Bank has launched a new interest-only mortgage product aimed at the retirement market. The bank will lend to those aged between 55 – 75 providing the customer is no older than 85 at the end of the new mortgage term.
There now a number of mainstream lenders who are prepared to lend to customers aged in their 70s and 80s. For those borrowers coming to the end of their mortgage term but needing more time to fund repayment, a further expansion of this market will give more choice to roll-on their mortgage debt to a new product and thus avoid repossession.
It is important that lenders doing business in the retirement market highlight to customers that whilst they can delay repayment by switching to a further interest-only product, this doesn`t alleviate the need for an ultimate repayment vehicle.
This bill was published in February and is being supported by both The Children's Society and television money expert Martin Lewis. The Children's Society estimates that there are 1.4 million families in the UK living in debt (excluding mortgages) and that this has a significant impact on children's wellbeing. The bill aims to address this issue by creating a family debt respite scheme.
It is intended that families can be entered onto the scheme by an application made by a debt advice provider. Once on the scheme the family will be given a period of up to 12 months of breathing space from their creditors. This means that creditors and mortgage lenders will not be able to take any enforcement action (including possession proceeding). Any claim already underway will be stayed while the family remain on the scheme. In return the family will need to enter into a debt repayment plan.
This bill has been introduced as a private member bill and as such is competing for parliamentary time with other private member bills. The bill will be debated on 12 May but due to time restraints it is likely that the bill will be delayed. We will report further once more news is known.
Here is some of the month's main news from this rapidly expanding corner of the lending market -
The Bank of England is considering measures to curb consumer credit to mitigate the risk to the national economy.
The Financial Policy Committee is concerned about the rapid growth (11% p.a.) in unsecured borrowing and credit card debt and the risk that this debt would represent if the UK entered an economic downturn. Key concerns are that:
Interest-free periods on balance transfers have increased to 43 months in some cases, making this form of borrowing more attractive to consumers aiming to delay repayment; and
Whilst a borrower may be prevented from taking out a large mortgage if they have already incurred significant unsecured debt, there are no parallel limitations to prevent someone with a large mortgage taking on significant unsecured debt.
Credit card borrowing reached an 11-month high of £301 million in February 2017, with overall credit card borrowing at £66 billion across the UK (i.e. 4.4% of the national mortgage debt).
The bank has not set out any proposals to intervene so far. However, as the FPC does not hold express powers to curb consumer credit, an alternative measure would be to increase capital requirements (already a source of ire for smaller lenders) in order to mitigate higher risk lending.
Research by L&C Mortgages suggests that over one million UK homeowners are not on optimal mortgage deals and could otherwise be saving some £2,500 per year.
30% of households do not know their current interest rate, suggesting a lack of consumer awareness in the mortgage market.
In addition, 36% of homeowners are currently on standard variable rates, which generally result in monthly mortgage payments that are several hundred pounds above those due on more competitive, fixed rate products. L&C estimates that this might equate to average unnecessary spending of £266 per month on an average London property.
Whilst many of the borrowers surveyed considered they were paying too much to their lenders, the vast majority admitted that they had not taken any action to address this overspending. The research suggests that the average UK borrower could save some £215 per month by remortgaging to a more advantageous product.
With unnecessary debt servicing exacerbated by an increasing cost of living, it is likely that this research will be widely publicized. This in turn provides opportunities for lenders to secure new business as borrowers are likely to be increasingly receptive to the idea of remortgaging.
Nationwide has launched a Family Deposit Mortgage that makes use of equity in a parent's property to provide deposit funds for children.
The product works by allowing parents to leverage additional borrowing secured on their property (up to 80% LTV), to raise a deposit for the child's use. It can also be used to assist older relatives. The mortgage is available to new members and those re-mortgaging.
Whilst parental lending is nothing new, the Family Deposit Mortgage offers a more formal, structured framework for family lending and does not require the 'bank of mum and dad' (which currently lends £5 billion per year) to liquidate a cash deposit.
With house prices still rising, low interest rates and high rents, this product represents an innovation which may provide some first time buyers with a new route onto the property ladder.
Rising food and fuel prices have pushed inflation beyond the Bank of England's 2% target, to 2.3% as sterling's post-Brexit decline makes everyday items more expensive.
This is the first time inflation has exceeded the Bank's target since November 2013 and is likely to reinvigorate calls to increase the interest rate beyond 0.25%, later in the year. However, so far only one of the nine rate setters on the Bank's Monetary Policy Committee has voted to increase rates to curb inflation.
The Consumer Price Index has risen over the past three months, reducing real wages throughout the first quarter of the calendar year. Oil is becoming more expensive as a result of the weaker pound as producers pass increasing import costs on to consumers.
This led to a 0.3% reduction in retail sales in January, suggesting that inflation is exerting pressure on household spending. February's data shows that this trend will continue.
The Bank forecasts inflation to rise to 2.8% in the first half of next year, before falling back to 2.4% in three years' time. Consumer watch groups have predicted that consumer spending will reduce further in mid-2017 as a result of continuing inflationary trends.
The government has published details of its Great Repeal Bill, described by the PM as an "essential step" in Britain's exit from the EU.
The Bill provides that EU law no longer automatically applies in the UK. It will also end the jurisdiction of the European Court of Justice.
Whilst all existing EU legislation will be copied over into domestic law to ensure that the UK can function as usual, the Bill will provide the opportunity for Parliament to either repeal, retain or amend individual pieces of legislation.
The government is due to publish a white paper setting out the mechanics of the Bill. However, at this stage it is clear that the Bill will be of importance to lenders, given the volume of financial services regulation that arises from Brussels. The Bill presents lenders with the opportunity to lobby government for any changes they would like to see to the regulatory regime.
Six member organisations from the banking and finance world will come together this summer to form a new trade body that has snappily named itself 'UK Finance'.
The new 'super-body' will integrate six giants of the financial services world in the UK - the Asset Based Finance Association, the British Bankers' Association, the Council of Mortgage Lenders, Financial Action Fraud UK, Payments UK and the UK Cards Association.
Despite the fact that institutional banks such as Barclays, HSBC and the Lloyds Banking Group will be the largest fee-payers to the new organisation, the word 'banking' has been dropped from the title amid opposition from building societies and other prospective members, who felt UK Finance to be a more inclusive name.
Bob Wigley, the former chair of Merrill Lynch and one-time member of the Bank of England's Governing Council, has been appointed chairman. He will oversee the integration of these six founder members, as well as appointing the chief executive.
The main function of the new entity will be to pool the remits, skills and capabilities of each organisation with a set of unified objectives.
Secure Trust Bank, which currently offers only savings products, is moving into the mortgage market under the name 'Secure Trust Bank Mortgages'. Its target customers are contract workers, self-employed workers and those who have complex incomes or 'credit blips', who sometimes struggle to get mortgages from traditional lenders.
Fewer people nowadays fit into the usual '9-5' role. The Office for National Statistics estimates that there are at least 5.5 million workers who are either self-employed or on zero hours contracts. As a result, there will be more people encountering 'credit blips' and so struggle to get on the housing ladder.
Secure Trust's offering can be seen alongside other lenders who are also being innovative and flexible in their product development in order to adapt to a changing customer base.
A recent Mortgage Solutions poll has revealed that just one in five mortgage brokers offer buy-to-let applicants a personal and a limited company illustration on purchase applications. A further 40% said they did offer them when requested, but a similar percentage never offered them.
The corporate buy-to-let arena is a rapidly growing one, with lenders reporting at the end of 2016 that 69% of buy-to-let applications were being made through limited companies. Those providing mortgage advice should bear in mind significant tax advantages for some customers borrowing as a limited company.
On 3 April 2017, new legislation regarding Pursuers' Offers came into force in Scotland (similar to Defenders' Tenders in Scotland and Part 36 offers in England & Wales).
The new system formalises the procedure by which Pursuers can indicate what level of offer they are prepared to accept in full and final settlement. There are potential costs' implications, meaning that parties must be realistic about their prospects of success when litigating.
If the court considers that an offer was not accepted timeously, the Defender may be required to pay interest from the date of the offer plus a 50% uplift in the Pursuer's costs. So the earlier an offer is lodged, the greater the leverage for the Pursuer. If an offer is not accepted by the Defender and the Court awards damages at the same level of or higher than the offer, the Defender will face a 50% uplift on the Pursuer's costs.
There are no costs implications for Pursuers where a court award is lower than the offer made. Some argue that this is therefore unbalanced and in favour of Pursuers. Nevertheless, there remains a clear opportunity for Pursuers to encourage settlement by lodging an offer early on.
The rules apply in actions worth over £5,000.00. A Pursuer's Offer is lodged at court and can be made in cases involving financial claims. An offer can be made at any time prior to judgement. The Defender's acceptance must be unqualified, except for questions of indemnity, contribution or relief.
Louise McAlisterMike Seddon
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.