Mortgage industry of the United Kingdom
The mortgage industry of the United Kingdom has traditionally been dominated by building societies, the first of which opened in Birmingham in 1775. But since the 1970s, the share of new mortgage loans market held by building societies has declined substantially. Between 1977 and 1987, the share fell drastically from 96% to 66%, and that of banks and other institutions rose from 3% to 36%. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies and pension funds. During the four years after the financial crisis of 2008, the UK mutual sector provided approximately 80% of net lending to the housing market. There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain, with Lloyds Bank and the Nationwide Building Society having the largest market share.
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Mortgage lenders
Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market during this period were helped by such factors as:- relative managerial efficiency;
- advanced technology, organizational capabilities, and expertise in marketing;
- extensive branch networks; and
- capacities to tap cheaper international sources of funds for lending.
Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-thirds of the total market at the end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures and functions. When the Abbey National building society converted into a bank in 1989, this could be regarded either as a major diversification of a building society into retail banking – or as significantly increasing the presence of banks in the residential mortgage loans market. Research organization Industrial Systems Research has observed that trends towards the increased integration of the financial services sector have made comparison and analysis of the market shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and performance on the part of some mortgage lenders in the UK over the years:
- the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in production and marketing operations – insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products;
- buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds ;
- lower levels of arrears, possessions, bad debts, and provisioning than competitors;
- increased flexibility and earnings from secondary sources and activities as a result of political-legal deregulation; and
- being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.
Mortgage types
As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate or a tracker rate, which will tend to be linked to the underlying Bank of England repo rate. Initially they will tend to offer an incentive deal to attract new borrowers. This may be:
- A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
- A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
- A discount rate; where there is set margin reduction in the standard variable rate for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate and sometimes the rate is stepped.
- A cashback mortgage; where a lump sum is provided as a percentage of the advance e.g. 5% of the loan.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a longer period. These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.
Self-certification
These types of mortgages were banned from April 2014 for UK lenders. Although they haven't been banned completely by the UK regulator as they are available from European lenders.Self-certification mortgages, informally known as "self cert" mortgages, were available to employed and self-employed people who have a deposit to buy a house but lack sufficient documentation to prove their income.
This type of mortgage was typically used by people whose income came from multiple sources, whose salary consisted largely or exclusively of commissions or bonuses, or whose accounts did not show a true reflection of their earnings. Accounts not showing a true reflection of earnings could have been due to undeclared income, for example, tips paid to those working in the hospitality industry or taxi drivers receiving cash payments. Self-employed people exaggerating expenses to lower taxable income created another group of applicants for self-certification mortgages.
These mortgages had two disadvantages: the interest rates charged were usually higher than for normal mortgages and the loan to value ratio was usually lower.
Since their abolition, there has been a common misconception that self-employed mortgages are now unobtainable. Whilst it's true the restrictions placed have left many creditworthy self-employed borrowers unable to finance, it has created niche markets for newly self-employed or borrowers who chose not to draw all their profits, that are now occupied by numerous specialist lenders.
100% mortgages
When a bank lends money to a customer, they want to minimise the risk of not getting the money back. They manage the risk through their lending criteria, carrying out checks on the applicant and the property and also by asking the borrower to fund a certain percentage of the property purchase in the form of a deposit.The higher the deposit, the lower the mortgage amount, so lower the risk of not being able to recover the loan when selling the property in case of a repossession.
100% mortgages are mortgages that require no deposit. Examples include:
* some first-time buyer deals, when perhaps a portion of the loan is secured against a parent's property;
* concessionary purchase, when the purchase is at below market value;
* Right to Buy purchase at a discounted purchase price;
* Shared Ownership purchase
100% mortgages normally offer higher interest rates than deals with even just 5-10% deposit.
Together/Plus mortgages
A development of the theme of 100% mortgages was represented by Together/Plus type mortgages, which stopped after the 2007-2008 financial crash.Together/Plus Mortgages represented loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans were normally structured as a package of a 95% mortgage and an unsecured loan of up to 30% of the property value. This structure was mandated by lenders' capital requirements which required additional capital for loans of 100% or more of the property value.
The mortgage part was typically on an interest only basis, while the unsecured loan was on a repayment basis. This meant that when making monthly payments, only the balance for the unsecured part would reduce. This arrangement often resulted in the borrowers becoming "mortgage prisoners" after the lenders stopped operating, property prices were not rising and the customers were unable to remortgage or sell their property. If they sold the property, the sale price would not cover the mortgage and the unsecured loan, so they would be left without a home and still carry some debt.
Contractor Mortgages
Contractor mortgages were developed for two specific types of independent contractors. First, contractors in the UK who incorporate a limited company to use as a payment structure. Second, contractors who likewise operate through a Ltd company payment structure, but do so via PAYE Umbrella companies.The underwriting criteria that banks and building societies use for this type of mortgage loan is "contract-based underwriting". This is expressly different from traditional PAYE "employee", or even self-employed, affordability criteria.
These are still ′prime rate′ mortgages and normally available via any broker, although some brokers may not have enough knowledge or experience to source the most suitable deal for the customer. In comparison, if a contractor customer goes directly to a lender who offers contract rate based underwriting, the lender's advisor often insists on assessing income based on Ltd company accounts.
The demand for contractor-specific mortgages has risen since the credit crunch. Since 2015, mortgage lenders have added contractor mortgages to their offering at unprecedented levels to accommodate the surging gig economy in the UK.
UK mortgage process
Arrangement fees and survey fees are components of the Cost of moving house in the United Kingdom.Typically, would-be borrowers approach their bank for a single range of products, or use an intermediary for access to a select panel of lenders, or the whole market. The first stage is to complete a full fact find. The advisor will then search for the right deal for the customer, and then proceed to get an agreement in principle from the lender. Although an indication of lending approval, this is not set in stone until the mortgage is formally offered, post valuation of the property and assessment of the necessary supporting documents.
Arrangement fees
UK lenders usually charge a fee for setting up the mortgage.Valuation Fee
The arrangement fee will be followed by a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about.It does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue in contract if the survey fails to detect a major problem. However, the buyer may have a remedy against the surveyor in tort.