Mortgage Anarchy in the UK

10/12/2018

Mortgages and Personal Finances are strongly in the spotlight.

With regulation well entrenched in Australia, and the Royal Commission Report imminent, what can we learn from the experiences overseas?

England and the UK are a worthy benchmark to consider, with regulation further advanced than Australia.

Post the GFC, regulators were active in driving higher lending standards.  This certainly heightened standards and expectations of both customers and brokers alike, though there are some learnings for Australia.

STRUCTURE & PRICING

The UK mortgage market is one of the most innovative and competitive in the world.  The central bank rates are at an all time low (0.75%).

2-year fixed-rate products are the most popular with brokers in particular, representing around 70% of all sales.  They are priced very competitively (circa 2.50%), currently well below variable or “tracker” variable rates.

Pricing has been driven by risk (think Loan to Value Ratio) for some time and this has emerged in Australia too.

Lloyds, Nationwide, RBS, Santander, Barclays and HSBC are the top 6 mortgage providers and they account for around 70% of the total market.

MORTGAGE BROKING

There are less Mortgage Brokers in the U.K (10,000) than Australia.  The industry fell by two-thirds from the GFC as commissions fell, however, those still in the industry have grown market share from 50% to 70%.

Brokers receive upfront commission from lenders (“Procuration fees”), and are typically around 0.40% of the loan amount.  Whilst there is no “trailing commission”, since 2016 more and more lenders are paying a “retention fee” (typically 0.2%) for renewing an existing loan facility.

In addition to this, brokers generally charge the customer a fee (circa $500) along with other establishment costs from the lenders.

“MORTGAGE PRISONERS”

U.K. Regulation in Financial Services is governed by the Financial Conduct Authority (“FCA”).

Ironically it is looking at regulation to make it easier for mortgage customers to switch providers.

Whilst they reiterate that “Affordability is integral to our responsible lending rules. And it would not help anyone to switch to a mortgage they cannot afford.” They also counter with “It cannot make sense to deny a cheaper deal to someone who has maintained a good record with higher payments.”

Open Banking is seen as a key vehicle for facilitating this process, allowing greater transparency for credit providers to make informed decisions.  In fact, some of the research highlights some of the experiences in Australia.

The gap between fixed rates in the UK, and the higher Standard Variable Rates that these loans roll over to, mean that lack of switching options is costly.

UNCERTAINTY

A little like the Royal Commission, the U.K. are dealing with uncertainty too around how the Brexit fiasco will end.  There are fears around the impact on property, finance and the broader economy will be significant.  Many are saying it will be another test for the banking industry.

LEARNINGS

So with a Royal Commission Report looming, and high household debt being of concern to policy makers, what can the various stakeholders in the mortgage industry take from the experience overseas?  As we see it:

A balance is needed between rigorous credit assessment, and the actual ability to service a mortgage over a sustained period.

With rising costs of business, Broker firms will focus much more on higher-value mortgages and ones that are more difficult to place.

As fear subsides, Technology and Open Banking must be used as a key plank in delivering a more efficient mortgage process.   Advisers that are not ready for that will be left behind.

Hopefully 2019 and beyond brings balanced reform.