Lender responds to brokers’ concerns over its seven times LTI mortgage
Borrowers in the UK are vulnerable to rate shock in a mortgage market that’s geared towards short-term fixed rates and could have a devastating impact on their lives, causing ‘astronomical’ stress, suggests Mark Eaton (pictured), an executive from April Mortgages.
The lender has in the past week announced enhanced loan-to-income criteria that offers eligible borrowers up to seven times income on its 10- and 15-year fixed rate products. Some brokers have voiced concerns that it may be a stretch too far, but Eaton, who is chief operating officer at April Mortgages, identifies issues with the market in its current form.
“The UK mortgage market is weighted to short-term mortgage products, with borrowers being asked to accept the risk of new mortgage rates every two years, with very little certainty over what the rate may be in two years’ time,” Eaton told Mortgage Introducer. “This has left many exposed to the risk of rate shock, which can have a catastrophic impact on the lives of borrowers and their families. For borrowers, the stress and uncertainty caused by risk of being unable to pay the mortgage is astronomical. Having your home at risk impacts people and their families, and their whole sense of stability. Fixing the mortgage rate for a decade or more takes the risk of rising monthly mortgage payments away.”
April Mortgages specialises in longer-term fixed rates and Eaton pointed out that a rate reduces on the lender’s products as the mortgage is paid down, so that monthly repayments reduce over the life of the loan. “Modern, flexible fixed rates, which reduce as loan-to-value drops and don’t tie people down with ERCs in the way that traditional longer fixed products do are a game changer for the market,” he said. “The security that borrowing over 10 to 15 years brings enables people to buy homes fit for the future with space to grow, while maintaining peace of mind over what their mortgage payments will be.”
The increased LTI announced by April Mortgages is available to applicants with a household income of £50,000 or more, offering up to 85% LTV. Loan sizes range from £50,000 to £1 million, with exceptions considered on a case-by-case basis up to £2 million. The maximum term is 40 years, and the product is available on residential purchase and remortgage applications - excluding new build and buy-to-let - across England and Wales.
Responding to the reservations of some brokers, reported by Mortgage Introducer, Eaton said he absolutely agreed that any customer ‘stretching too far’ should not consider a seven times LTI mortgage. “Our products are available through mortgage advisers only,” he noted. “Applicants will have gone through a full advice process tailored to their needs, and then gone through our own comprehensive affordability assessment as well as credit checks and personal underwriting. This product is about choice, arming mortgage brokers with the tools in their toolkit to support borrowers as part of an overall advice process.
“By fixing short you are in effect betting your house on the swaps market and gambling that you win. This is a gamble some borrowers might be comfortable with. We know many, when the risks of the gamble are well understood, prefer the peace of mind that comes with payment certainty. It’s a conversation about personal risk appetite, in the same way any other investment, such as a pension, is viewed. You should make informed choices based on your personal appetite to risk. Unfortunately, in many areas of finance, people get hooked on the 'cheapest is best’ without understanding what the potential real costs might be in the future.”
Eaton continued: “At April, our purpose is to educate and support brokers and customers to have the conversation about personal risk appetite. If borrowers go into a short-term deal with their eyes wide open to the risk, great. All we ask is that it’s a conscious choice to take on the risk of rate shock, not a default position, because borrowers deserve better than that. The demand for homeownership remains high, the gap between house prices and average earnings continues to widen. As lenders we either step up and help or we watch more of our friends and family struggle to achieve their home ownership ambitions. Responsibly helping borrowers step onto and up the property ladder requires innovation from lenders, but in a balanced way that brings both certainty and flexibility together.”
Read more: How risky are long-term mortgages?
Lender seeks a ‘major cultural shift’ to mortgage risk
April Mortgages is a relative newcomer to the UK market, having originated from the lender MUNT Hypotheken, established in the Netherlands in 2014. “I feel really excited about the future for April,” Eaton shared. “I am delighted with our entry into the market. We have an incredibly talented team who are always innovating and raising the bar. From a standing start, we have developed incredibly strong distribution partnerships which have been critical as we have rolled out across the market. What we are asking for next is a major cultural shift to the way we think about the risks associated to mortgage debt. We want to deepen our relationships with advisers who ‘get it’ and are committed to best outcomes.”
The best business lesson that Eaton has learned in his career is about the value of ‘challenging the norm’, as he puts it, which arguably defines April Mortgages’ approach. “Just doing what others do because that's the way it's always been done is rarely the right thing to do,” he said.
