Welcome to TLT's busy lenders' monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.
35 year term mortgages have been possible for some years now, but until recently they have been the exception rather than the norm.
Recent figures show that, in 2015, 26% of all first time buyers took out a mortgage with a term of 35 years. Back in 2007, only 15% of mortgage applicants sought such a lengthy term. Comparing this with the demand for what are historically "standard" figures, only 30% of applicants in 2015 sought a mortgage term of 20-25 years, down from 48% in 2007.
In the round, this appears to be an odd trend. Interest rates remain at record low levels, making shorter term loans more affordable than ever. So what are the possible reasons for this and what impact might it have?
Regulators encourage more repayment products (which accounted for 88% of mortgage lending in 2015). It is thought that this has increased mortgage terms in return for reduced financial repayment burdens. In turn, this enables people to climb onto the increasingly expensive property ladder.
To put this into context, the same monthly repayment could fund a 20% larger mortgage over a term of 35 years when compared to a term of 25 years.
One obvious danger of longer term mortgages is that applicants are potentially stretched time wise. They may not, realistically, have sufficient income to cover the repayments, particularly in retirement.
Another pitfall is that, if a customer gets into financial difficulty during the course of a long term mortgage, the lender may be unable to extend the term to provide more affordable repayments. To counter this, lenders could adopt more robust positions around defaulting customers, or deploy more flexible options in account rehabilitation.
The UK’s largest high street banks have pledged their support to a change in mortgage terms that will benefit 265,000 armed forces personnel.
Armed forces personnel posted overseas will be able to rent out their homes, when deployed, without facing changes to mortgage terms or increased costs.
Currently, the majority of members of the armed forces who rent out their house during deployment have to change their residential mortgage to a buy-to-let mortgage. This can often result in new product charges and increased interest rates. The new agreement, which is supported by the large banks, including Barclays, Lloyds Banking Group and HSBC, will provide time and cost savings.
This agreement between the government and British Bankers’ Association has been reached ahead of the Armed Forces Covenant roundtable meeting of banking heads and Ministers at Downing Street. The roundtable consists of 800 business signatories, of which 29 are from the financial services sector. Other measures on the agenda centre on the unique pressures that the armed forces and their families can face. Being located abroad can impact on credit history which has a knock on affect when applying for financial products and accounts.
The Covenant is a legal commitment to deliver the best possible outcomes for the armed forces. The major banks and building societies, who are signatories to the Covenant, have a key role to play.
As mortgage lending has spread its wings following the financial crisis, a major focus of both lenders and the government has been on first time buyers.
Whilst a number of lenders are now participating in the 'Help to Buy' scheme, Clydesdale and Yorkshire Banks have launched a new mortgage aimed at second time buyers, which requires just a 5% equity stake, seeing the return of LTV rates in excess of 95%.
The product is fixed for three years at 4.49%, with no arrangement fee.
This is a reaction to market research which has shown that first time buyers are remaining in their properties for 37% longer than they would like and are struggling to take the next step on the property ladder. However, there is no clear verification on how realistic these expectations are.
This product represents an interesting step beyond this round of mortgage lending's initial focus on the first time buyer and acknowledges the fact that rising house prices represent difficulties to those at different levels of the property ladder.
Investors are rushing to tie up buy-to-let investments before the upcoming tax increase, as the market reacts to the first initiative in the government's tranche of buy-to-let reforms.
RICS data shows that demand for buy-to-let properties hit a three-month high last month as investors scrambled to complete purchases before the stamp duty increase due in April. Expectations are that the level of transactions will continue to increase at least until the new tax regime takes effect.
The increase in buy-to-let purchases fuelled increased mortgage lending to its highest level since 2008 (£220 billion), taking into account the anticipated seasonal fall in December.
Whilst the CML expects that lending will decrease generally going forward, as the impact of the new tax regime takes effect and supply continues to cause problems, it is possible that there will be a further spike in buy-to-let activity post April, if prices fall as a result of the tax increase. The next quarter promises to be unpredictable but potentially lucrative for investors and their lenders.
New lender selfcert.co.uk made a huge splash on its entrance to the UK mortgage market in December.
The start-up lender, which is backed by private equity, claims to have been approached by over 4,000 borrowers in its first 48 hours of trading. The level of interest was too much for the company's website, which had to be taken down and re-vamped to cope with the sheer volume of enquiries.
Selfcert.co.uk has courted controversy by setting up in the Czech Republic, in order to circumnavigate the UK prohibition on FCA-regulated lenders offering self certified mortgages.
The lender is reportedly offering a tracker loan, set at 2% above base rate, and will lend up to £500,000 at 85% loan-to-value, with fees of around £600.
As an exercise in blue sky thinking, selfcert.co.uk plans to analyse applicants' lifestyles via social media, to assess affordability.
It remains to be seen whether advances in social media and the continuing expansion of online data analysis tools will enable selfcert.co.uk to avoid the issues that arose from self certified mortgages prior to the 2008 crash. Given the astronomic levels of interest expressed to date, the company is assured of a sufficient data set on which to test the prototype analysis.
Former heavy hitters of Platform, Northern Rock and PIMCO are to bring new lender Belmont Green Finance to the market.
Belmont (based in Egham) will be a wholesale-funded lender working through intermediaries only. The company is backed by US private equity firm Pine Brook which manages capital of some US$6 billion.
Belmont has confirmed that it is currently exploring opportunities in retail mortgage lending with a view to challenging the status quo of more established players in the market.
There is currently no 'go live' date for the new lender. However, given the FCA's newfound appreciation for challenger banks, private equity's renewed appetite for mortgage backed securities and established lenders' continuing to compete over low interest rates, it is likely that we will see further start-ups entering the lending market in 2016.
House prices across the UK increased by 7.7% between November 2014 and November 2015.
Whilst it is accepted that the growth in house prices is driven to a certain extent by a lack of supply, looking beneath the surface reveals that this may be due to a shortage of SME house builders in the market.
In the mid-1990s, SME house builders made up two thirds of the sector. The average house price, adjusted for inflation, was around £60,000.
At present, SME house builders account for one third of the sector, with average house prices at £140,000.
Construction groups have suggested that SME house builders can have a positive impact on the current housing crisis and have urged government to provide assistance in the form of tax reductions and relaxed regulations.
Whilst the administration proposes to step up its regulation of the buy-to-let sector, some suggest this will be an interesting opportunity for the government to take a pro-active step to encourage small businesses and address the current shortage of housing stock. If successful, SME lending will welcome the initiative.
Inflation increased for a second consecutive month in December following the best part of a year in stasis/decline as the recent decline in oil prices and the knock-on reduction in transport costs impacts on economists' year on year comparisons.
Despite modest growth (0.1% to 0.2%), inflation remains comfortably below the Bank of England's target of 2%, providing further support for the recent decision to hold off on a rate increase.
Analysts' suggestions that inflation may remain at low levels for a significant period as a result of increasing debt and increasing international trade online have even given rise to speculation that a rate rise may not materialise before 2018.
Whilst low inflation is good news for consumers, it does little for savers who are unlikely to see rates increase for the foreseeable future.
Rising house prices and cheap mortgage deals mean that property investment may represent an alternative offering increased rewards compared with ISAs and bonds and more security than the stock markets.
In March 2015 the Financial Services Trade Associations Review was commissioned by nine of the UK’s largest banks. In July, the recommendation was to consolidate the various trade bodies that banks and building societies belong to. The aim is increased influence to protect the industry and efficiency, by removing duplication of work by the existing bodies. For such a structure to be successful it is important that expertise is not lost and the new organisation promotes the industry in the same manner as the existing bodies.
The trade bodies included in the proposed merger are the Council of Mortgage Lenders (CML), The British Bankers’ Association, Payments UK, the UK Cards Association, the Asset Based Finance Association, the Intermediary Mortgage Lenders Association and Financial Fraud Action UK. However, it appears that the Finance Leasing Association and the Building Societies Association are abstaining from the merger.
This month Barclays Bank and HSBC confirmed support for the new trade association. Both banks announced that they will not be renewing their membership to the CML at the end of the year.
The various trade associations will need to agree with their members whether to accept the proposal to become part of the new structure. CML will vote on the proposal within this year’s first quarter. This means that there may be some lead in time in the creation of the new trade body. Given that two of the UK’s biggest banks are already showing support, it seems that the idea of a super trade body does indeed have the industry’s backing.
The Court of Session has found in favour of Clydesdale Bank in a case of alleged mis-selling of tailored business loans (TBLs), brought by action group founder John Glare.
Mr Glare was the founder of an action group protesting against alleged mis-sold loans to SMEs. He first brought the £4 million claim against the bank in September 2013. He claimed damages for loss of business and bankruptcy. Mr Glare argued that, but for the mis-sold TBL, (i) he would have sought and obtained a variable rate loan and (ii) his business would have been successful and he would not have been made bankrupt.
The bank admitted that the TBL was not an appropriate product for Mr Glare, accepting that it would be liable for any loss and damage caused to Mr Glare as a result of him entering into the TBL. However, the judge concluded that Mr Glare had failed to prove that he would have obtained a variable rate loan. Further, even if he had done so, he would have paid the same amount of interest on a variable rate and his business would have been just as likely to fail. Evidence presented to the Court showed that Mr Glare’s business had been operating at a loss over the preceding years. This, coupled with his inexperience in hospitality and the credit crunch, led the Court to conclude that his business would have suffered the same losses, irrespective of the TBL.
This case illustrates that a finding of mis-sellling is not enough. Such claims can be successfully defended if it can be shown that there was no causal link between the losses suffered by the business and the actions of the bank.
Housing association tenants can now apply to buy their homes using the government's right to buy scheme. At present, the scheme applies to a pilot of five housing associations (L&Q, Riverside, Saffron Housing, Sovereign and Thames Valley Housing Association). A national rollout, to include all housing associations in England, is scheduled for later this year.
Right to buy was originally introduced in 1980 and allows people to buy their rented homes at a discount. Until now, the scheme has only been available to council tenants, but the government’s plans extend the scheme to 1.3 million housing association tenants. The maximum discount you can get when using right to buy is 70% of the purchase price of your home - up to a maximum of £103,900 in London and £77,900 elsewhere in England.
Communities Secretary, Greg Clark, said "Anybody who works hard and aspires to own their own home should have the opportunity to realise their dream. The right to buy is central to that and has already helped more than 46,000 into homeownership since we reinvigorated the scheme in 2012."
The Cabinet Secretary for Social Justice, Communities and Pensioners Rights recently launched the Help to Buy (Scotland) Affordable New Build Scheme.
This scheme is one of a few launched by the Scottish government in order to support 5,000 householders buy their own homes during 2016/17. More than £160 million of new funding will be made available for the schemes throughout 2016/17.
The scheme will include over £58 million for increased support for purchases from small developers. Under the scheme the Scottish government will contribute a maximum of 15% equity stake towards purchases.
The scheme will help thousands of lower income households buy a new-build home and opens for applications on 1 March 2016.
Social Justice Secretary Alex Neil said "I am delighted that we can help 5,000 home buyers into affordable home ownership in the coming financial year, underpinned by £160 million, which is £35 million more than originally planned for this year.
"Through help to buy we have already helped 7,500 households buy a new build home and over the next three years our successor help to buy scheme will help another 7,500 as well as boosting the home building industry, and support jobs across Scotland.
"Homes for Scotland and the Council of Mortgage Lenders expressed clear views about how help to buy should be improved. We have listened carefully to what they told us and worked with them to develop the scheme to support industry and buyers as much as possible".
A couple in Northern Ireland who lost £46,000 on an unbuilt holiday home in St Lucia have received a boost in their battle to recoup their losses. In an interesting development in the High Court in Belfast, a judge granted them leave to seek a judicial review of their case. The couple claim that a financial adviser in Northern Ireland persuaded them to remortgage their family home and recommended the Caribbean development. The couple maintain that it was the financial adviser's negligent financial advice which caused their loss when it transpired that the Caribbean property was never built.
The couple initially sought compensation through the Financial Services Compensation Scheme but their application was rejected on the basis that investment advice is not covered by the fund. Having secured leave for judicial review, a judge will determine whether the Scheme's rejection of their claim is correct.
Interestingly, the judge discounted arguments that the case has no public interest, particularly in circumstances where the couple are able to make the repayments. The judge also noted that judicial review of the Financial Services Compensation Scheme is the couple's only option as the financial adviser is bankrupt. Commentators have speculated that if the couple succeed in their claim, this paves the way for numerous other unlucky property speculators to bring claims.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com