By Lucy Barrett, Managing Director, Aria Finance
The specialist residential mortgage market has experienced its fair share of highs and lows over the years.
The mid-1980s to early 1990s were characterised by boom and bust, but the market really came into its own in the 2000s.
A sharp fall in interest rates compared with the previous decade, soaring house prices, an abundance of cheap funding and a thriving economy tempted swatches of new lenders into the market. By the middle of the 2000s, the sector was soaring, with specialist lenders advancing £17bn in 2007 alone, according to Intermediary Mortgage Lenders Association (IMLA).
However, that was to be the crescendo moment. The financial crisis and the regulatory clampdown that followed it nearly killed off the specialist residential market entirely.
It's been a lorn road back. A study last year conducted by economist Dr John Glen on behalf of lender Together estimated the specialist resi market to be in the region of £5bn.
While that is a fraction of the market's 2007 peak, it's worth pointing out that specialist residential lending has grown 66% in the past five years. Given the economic backdrop, I expect that will be a trend that will continue both in 2023 and in the years to come.
The main reason for that, of course, is that borrowers and households in general are being hammered by a toxic combination of higher mortgage rates, falling real wages and sky-high inflation.
Remember, too that the financial resilience of households was tested to the hilt by the global pandemic, which many people are still recovering from financially. If we tip into recession, that resilience will be tested even further.
The trouble is that, as a nation, we had become used - addicted, even - to cheap debt, therefore very few were prepared for rates to rise as high or as quickly as they have done.
A year ago, most borrowers with a decent amount of equity in their property could of equity in their property could achieve a rate of around 2% to 3%, according to data firm Moneyfacts. However, the 1.4 million borrowers who, according to the Office for National Statistics (ONS), will see their fixed rates come up for renewal this year are looking at mortgage rates more in the 5% to 6% range, or even higher.
It's unsurprising, then, that many people are finding it difficult to make ends meet, and are turning to unsecured debt to make it through the month. Data from the Bank of England (BoE) shows brits piled £1.2bn of net debt onto their credit cards in November - the most in any single month since March 2004.
That is clearly a sign of financial distress, and unfortunately, many experts believe that will soon translate into higher numbers falling behind on their mortgage payments.
UK Finance predicts arrears and possessions cases to leap 23% and 78% to 98,500 and 7,300 respectively, in 2023. The Financial Conduct Authority (FCA) is even more pessimistic, telling a cross-party Treasury Select Committee recently that 570,000 homeowners risked falling into arrears over the next two years.
That is only half the story, though. There will be plenty of people out there who manage to keep up to date on their mortgage payments, but fall behind on other loans and credit card payments. As everyone reading this article will know, this can have hugely negative effect on a borrower's ability to access credit, and hangs on credit files for years.
While the situation may seem dire, it is far from hopeless. After years of steady recovery, the specialist residential market is once again operating at decent scale.
As recently as the middle of the last decade, trying to find a lender willing to advance cash to someone with County Court Judgments (CCJs) was like trying to find a needle in a haystack. While lending volumes are nowhere near their peak, a steady flow of lenders have entered the market with offerings aimed squarely at the very borrowers I am describing. Increased competition has led to a greater number of options for those who, through no fault of their own, have less than perfect credit histories.
This year, and in the years that follow, these lenders will be called upon more and more.