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Ladies and Gentlemen,
Welcome to the UK Finance Annual Mortgage Lunch. For those who don't know me, my name is Richard Rowntree and I?m the Chair of the Mortgages Product and Service Board at UK Finance.
I?d just like to spend a few minutes covering some of the key recent developments in the mortgage market and then, look ahead to what we can expect in the remainder of 2019.
As Stephen mentioned earlier, 2018 was dominated by the FCA's Mortgage Market Study and the issues it raised. Following the publication of the final report on March 26th and the avalanche of emails that we all received that day, it looks like 2019 is going to follow in a similar vein.
On the whole, we welcomed the FCA's report, especially the reconfirmation from the interim report that in many respects, the mortgage market is working well for customers who are being treated fairly.
There were of course some areas where we, as an industry, are seen to be falling short of the FCA's vision, and they?ve made a number of recommendations for change.
The topic that has generated the most headlines is what's become known as the ?mortgage prisoner? issue. Following the industry agreement co-ordinated by UK Finance, active lenders have made good progress in assisting those customers who are on reversion rates and may be able to save money by switching to a better deal. Over 26,000 customers were contacted by the end of 2018.
However, this arrangement only partly addresses the problem, because our industry agreement doesn't help the customers of either inactive lenders or unregulated entities.
From the FCA's own estimates, there are around 20,000 ?mortgage prisoners? with firms authorised to lend but are inactive, and around 120,000 who have mortgages with unregulated owners, who might also benefit from switching. These customers are up-to-date with mortgage payments but their current lender does not offer new deals and they can't switch because they don't meet the current affordability assessments.
The FCA's consultation on new lending rules published alongside the final MMS report would enable lenders to carry out more ?proportionate? assessments. The proposed rules will allow lenders to apply a modified assessment if the customer wants a new mortgage deal on their current property, is up-to-date on payments and doesn't want to borrow any more money, and If the new mortgage is more affordable than the present one.
This will be a key focus for UK Finance and the Mortgage Board in coming months.
One initial view is that the new proposals won't work for everyone. Lenders will need to make a commercial decision on adopting any new rules, especially as they will require substantial system and process changes.
The FCA are also suggesting that inactive lenders and unregulated entities go through their portfolios and identify consumers who could benefit and write to them, highlighting the changes that have been made, and suggesting how they could start the journey to lower mortgage payments.
This is definitely good news for some customers and I would encourage everyone to get involved in the consultation process with the FCA, either directly, or through the team at UK Finance.
But not everyone will benefit, and it's now for the Government to work with the FCA on full regulatory protections and fair treatment for the many thousands of customers with inactive lenders or unregulated owners, who we in the regulated industry, would still be unable to help.
In our response to the interim report, we said lenders wanted more clarity on the boundary between advice and execution-only, especially in a digital journey. We therefore look forward to seeing the consultation paper from the FCA on this in a few weeks? time.
The Mortgage Market Study report also touched on customers on reversion rates, estimating that there are about 800,000 consumers in this position. The level of switching has increased significantly in the last few years. In 2018 almost one in five mortgage customers switched their mortgage - a rate that stacks up well against any other industry.
The FCA signalled it would be undertaking further research to better understand the characteristics of those less active consumers who don't switch, reporting back later this year - something that we welcome.
Moving on from MMS to look at some other aspects of the market, UK Finance has also been heavily involved in the later life lending segment. The number of people over 65 is estimated to rise to over 17 million by 2034. Many older borrowers also want to help their children and grandchildren get onto the property ladder.
We?ve seen many lenders looking to meet the needs of older borrowers, often by increasing maximum borrowing age but also through more innovative solutions. Retirement Interest Only mortgages have got off to a slow start following the new rules from the FCA last year, but definitely have their place in assisting interest-only maturities. Meanwhile equity release has gone from strength to strength over the past couple of years.
The well-reported fact that only 112 RIOs were completed last year has drawn some media comment. Some argue that the product is still in its infancy and will grow in time, especially now that a major high street lender has entered the market. Others point out that the affordability constraints particularly affecting joint borrowers, where the loan needs to be underwritten on the lowest income of either surviving partner, will naturally limit the market for the product.
Time will tell of course, but the challenges for customers in an ever more complex market are great, and that means that advice is particularly important for those in later-life to ensure the best possible result for the borrower.
This is why at UK Finance, we support the call for more holistic advice so that customers take into account all their options - downsizing, thinking about tax and benefits, inheritance, use of pensions etc.
We?re supporting The London Institute of Banking & Finance as they develop qualifications for those advising in later life. It's important for brokers to have a good network so that if they are not qualified in a particular area, they can hand off to someone who can help.
We?re also working with lenders and the PRA to ensure capital treatment doesn't prevent lenders from entering this market.
At the other end of the lending lifecycle, it's good to see that Help to Buy has been extended to 2023, a decision that we actively supported.
There's been some good innovation in this area, such as guarantor or parental supported mortgages, but more is still needed. This includes commercial schemes to support a long term solution to the critical matter of deposits. As we know, a major source of deposits is contributions from parents - the good old bank of mum and dad. While BOMAD has its place, the danger here is that homeownership could, over time, become a hereditary entitlement. Therefore, the growing development of these schemes is welcome, so long as they are fair and transparent to customers.
Elsewhere, we have worked with the Department for Work and Pensions, lenders and the voluntary sector to minimise the impact on customers from the change of Support for Mortgage Interest from a benefit, to a loan.
We also published a new member-only Interest Only toolkit to share best practice among lenders and consumer facing information to encourage customers to contact their lenders. We were pleased to report the size of the IO back book has halved in 6 years.
So what do we, as an industry, have to look forward to, in the remainder of the year?
At this point it's just too unpredictable to know what 2019 might look like. The performance of the mortgage market is more than ever going to be dependent on consumer confidence, and that in turn, is going to depend on Brexit and its impact on the economy.
We do expect remortgaging and product transfers to continue to be strong in 2019 as they were in 2018, especially as previous 2 and 3 year fixed rate products come to an end. But with a move to over half of all new mortgages going on to 5 year fixed rates, the rate of churn will not continue at the same level into 2020.
As for the BTL market, here we expect to see the impact of tax, legislative and other changes continue to be felt, particularly as landlords have had to pay their first increased tax bills.
At UK Finance, we?ll continue to work with the Government on a number of areas of housing policy more broadly, including issues around leasehold reform, commonhold, modern methods of construction, the new homes ombudsman and the impact of LIBOR changes.
As mortgage lenders, we can lobby to ensure that no more properties with unfair lease terms come onto the market and as a body we?re aiming to do more to make clear the overall industry position on new build leasehold terms. We?re not in a position to directly solve this issue, but with two thirds of purchases made with the backing of a mortgage, we?re in a strong position to influence change.
We are working with the Ministry of Housing, Communities and Local Government on the new ombudsman service and hope that the final result will see standards raised across the new build market so that consumers are better protected.
UK Finance and mortgage lenders have been involved in the MHCLG-led group on Modern Methods of Construction. Progress may have been slower than originally hoped for, but we are confident that we will see a system in place to give lenders the comfort they need to lend on MMC at scale.
We know the transition from LIBOR to SONIA will be a substantial challenge for many lenders. UK Finance will continue to raise awareness of the legal and conduct risks facing our members, including ensuring that the new risk-free substitute for LIBOR is appropriate for the industry.
So, 2019 looks as though it's going to be a busy year for the industry as always. I?m looking forward to helping out in whatever way I can to ensure that UK Finance remains at the forefront in representing its members and their customers.
Thank you for listening and enjoy your lunch!