UK Consumer Finance & Mortgage Market
The UK population has a ‘live-for-today’ credit culture, with £1.2 trillion of personal debts – unsecured and mortgage debt. UK unsecured debt in 2005 accounted for over a third of all European unsecured debt, according to a recent Datamonitor study. It revealed that the average UK resident owed £3,175 in unsecured debt, compared to the average European at £1,558, and the UK was double its nearest rival in advances, which was France.
Higher debts have helped to increase the instances of mortgage arrears, CCJs, repossessions and bankruptcies. There has been an increase in the ‘non-standard’ population, i.e. there are more self-employed people and migrant workers.
The loans market is also affected by legislative influences, particularly with regard to regulation in mortgages and insurance by the Financial Services Authority. The Consumer Credit Act 2006 has reformed legislation and future changes are to be adopted. There is also pressure from the Office of Fair Trading with respect to ‘single-premium insurance’ and it has referred payment protection insurance (PPI) to the Competition Commission who’s findings have been particularly damaging for the industry.
The regulatory changes should lead to a more transparent secured loan market. For example, the OFT’s Consumer Credit Advertisements Regulation 2004 means less confusion for consumers, although there is still aggressive press and TV advertising.
There is a general market acceptance of credit, equity drawdown, living for today and paying it off tomorrow!
In a maturing market the pressure and competition among lenders on first mortgages is increasing. Legislation adds to the processing times and costs while margins and market share are becoming ever more difficult to deliver. The specialist market is becoming more mainstream and acceptable, particularly the second-charge lending market.
Niche markets
The secured loan, or second-charge, market is around 10 years old and has expanded rapidly over that time with compounded annual growth of more than 50 per cent over the last five years. It reached its peak in 2003 when gross lending reached £7 billion but towards the end of 2004 the market started to dip and is now worth around £6 billion. Some of the reasons for this were the five interest rate rises in 2003 and 2004, a slowdown in house price growth and a fall in consumer spending (ONS Social Trends 2007).
However, Datamonitor, which supplied these figures, believes the second-charge market will pick by the end of this year and grow steadily to £6.3 billion by 2010.
The market is still fairly buoyant and further fuelled by the current lack of primary finance available in UK housing and the insatiable appetite for credit that we have in this country.
On top of this it has significantly improved its market perception.
Equity release
Another growing area is the equity release mortgage market, which has seen compounded annual growth of 17.8 per cent over the last four years. In 2005 gross advances were estimated to be almost £3 billion. There is probably room for more competition as three players account for around 80 per cent of lifetime market share.
This market is also being fuelled by the pension crisis and a changing attitude to inheritance – the need to pass on inheritance to offspring will potentially change. A third of parents leave nothing to their children and the children expect their parents to enjoy their final years. In addition, the population that remains childless is expected to increase from 10 per cent to 20 per cent over the next 20 years.
Average loan
The average second-charge advance is quite high – it can be more than £40,000 and there are often loan-to-value constraints. Loan consolidation is the most common reason for borrowing, representing 55 per cent of total second-charge business. Borrowing money in this way is often positioned as a lifestyle change, for example after a relationship breakdown, loss of job and so on.
Redemption charges are high, often at 6 per cent, as the average loan is for 18 months. People sometimes use secured loans as a form of mid-term bridging as they try to get their life back on course and get into a position where they can swap their secured loan for a remortgage or further advance, or indeed pay it off.
Payment Protection Insurance
Each year @ 2.5m PPI policies are sold on mortgages alone - 75% are provided directly by the Lenders & 22% via intermediaries (source CML). The average cost of a policy is £2000 (source ABI) with typical undisclosed lender & intermediary commission of £1500 (source Mortgage Protection UK).
The interest alone on this undisclosed element during the course of a 25 yr mortgage is £4 900 (at current rates).
If you multiply 2.5 million by £1500 and take 22% of the figure (i.e. the broker introduced PPI) then each year £825m of undeclared commission has been charged to borrowers, and over 10 years this comes to £8.25bn. Compounded at current interest rates for the typical borrower the total value comes to £26.9bn.
This figure excludes any PPI sold in the second charge arena mentioned above and further excludes the £5.5bn a month lent by specialist lenders, excluding Banks & Building societies that is secured against property (source Bank of England).
Best Advice
Members will of course be aware of the need to give best advice to clients and as such should be aware of instances of where clients may have unwittingly been overcharged and resources available to them to rectify matters.
The LoanCheck Foundation
The LoanCheck Foundation’s main principle is to provide an ethical service. It has been set up with two main objectives in mind:-
1. To allow individuals to freely check to see if they are being or have been overcharged on a loan or mortgage.
2. To assist charities, good causes and community initiatives and allow their members or users free access to the LoanCheck facility, through LoanCheck’s calculator available on the website, (www.loancheck.co.uk)
This project has been developed and refined over the last 6 years, and has involved the collation of data and information from lending institutions, and the development of a computer based assessment process to enable a person to find out whether or not they have been a victim of overcharging.
The initial LoanCheck calculator questionnaire, which is on the website, provides information that can lead to a full audit of a mortgage or loan account and all the reports necessary to pursue lenders. This has been achieved by working with a number of solicitor firms nationally to process and run cases on a no win no fee basis, allowing consumers to pursue potential cases to a satisfactory conclusion without further financial risk to themselves.
John Whittaker
