Mortgage industry of the United Kingdom

The Mortgage industry of the United Kingdom has traditionally been dominated by building societies, but from the 1970s the share of the new mortgage loans market held by building societies has declined substantially. Between 1977 and 1987, the share fell drastically from 96% to 66% while 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 following the Financial crisis of 2008 the UK mutual sector provided approximately 80% of net lending to the housing market.^[1] There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain of which the Lloyds Bank and the Nationwide Building Society have the largest market share.

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.^[2]

By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in their market share. In 1990, the societies held over 60% of all mortgage loans but took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building societies also increased their share of the personal savings deposits market in the early 1990s at the expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.^[3] One study found that in the five years 1987-1992, the building societies collectively outperformed the UK clearing banks on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in 1990-91 was similar to the share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big four banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.^[4]

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 (especially when interest rates generally are being maintained at high levels internationally);
• 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.^[5]

Mortgage types

The UK mortgage market is one of the most innovative and competitive in the world. There is little intervention in the market by the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of 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 (BoE) repo rate (or sometimes LIBOR). 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 (over 5 years) 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 (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
• A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.

These rates are sometimes combined: For example, 4.5% 2 year fixed then a 3-year tracker at BoE rate plus 0.89%.

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 (referred to as an extended tie-in). 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

Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self-certification mortgages, informally known as "self cert" mortgages, are available to employed and self-employed people who have a deposit to buy a house but lack the sufficient documentation to prove their income.

This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is usually lower.

These types of mortgages are banned from April 2014. Although they haven't been banned by the Financial Services Authority yet, they are increasingly rare to find since the UK credit crunch ^[6] when banks have become much more risk adverse and with recent mortgage market reforms MMR where lenders are now required to demonstrate affordability.

100% mortgages

Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain percentage of the property purchase in the form of a deposit.

100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan.

Together/Plus mortgages

A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent years.

Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not universally) structured as a package of a 95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders' capital requirements which require additional capital for loans of 100% or more of the property value.

UK mortgage process

Arrangement fees and survey fees are components of the Cost of moving house in the United Kingdom.

Arrangement fees

UK lenders usually charge a fee for setting up the mortgage.

Survey 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. Also, 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. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time. However, the buyer may have a remedy against the surveyor in tort.^[7]

International comparisons

In the UK variable-rate mortgages are more common, unlike the fixed-rate mortgage common in the United States.^[8][9] Home ownership rates are comparable to the United States, but overall default rates are lower.^[8] In the UK, mortgage loan financing relies less on securitized assets (such as mortgage-backed securities) than the United States, Denmark, and Germany, and more on deposits like Australia and Spain, since funds raised by building societies must be at least 50% deposits.^[8][9] Thus, lenders prefer variable-rate mortgages to fixed-rate mortgages to reduce potential interest rate risks between what they charging in mortgage interest and what they are paying in interest for deposits and other funding sources.^[9] Prepayment penalties are still common, whilst the United States has discouraged their use.^[8] Like other European countries and the rest of the world, but unlike most of the United States, mortgages loans are usually not nonrecourse debt, meaning debtors are liable for any loan deficiencies after foreclosure.^[8][10]

References

See also

• UK mortgage terminology
• English land law
• Housing in the United Kingdom