The Interview… Kate Davies, executive director, IMLA

In the latest of our series of interviews with key industry figures, The Intermediary speaks to Kate Davies, executive director of trade body the Intermediary Mortgage Lenders Association (IMLA).

In this interview, Davies gives her take on the market, the cost of living crisis, client vulnerability and more.

We live in increasingly unstable times. What impact are the current issues having on the market?

We certainly do live in increasingly unstable times, and while we anticipate that this will impact the market in several ways, it will take some time for these impacts to become evident in terms of borrowers’ ability to repay their mortgages or take out new loans.

Large numbers of people saw significant changes to their employment and income patterns during the Covid-19 pandemic, but the effects on individuals’ financial circumstances varied considerably: we know that many households were able to save quite significantly during lock-down, as expenditure on eating out and entertainment was cut back. 

But the staff who work in the hospitality and entertainment sectors will have suffered significantly as their jobs disappeared, and many will have been living on savings during the lock-down periods. 

As we now see inflation levels rising and the cost of living increasing rapidly, many people will continue to live under the cloud of financial uncertainty.

So far as housing costs are concerned, a high proportion (75%) of those with mortgages are on fixed-rate products, and will therefore be cushioned from any immediate impact of increased mortgage repayments.

Similarly, for those in private rented accommodation, it may be some months before tenancy agreements are renewed and rents increased. 

On top of this, we have seen a significant increase in the number of people in their late 50s who are retiring.

Analysis of ONS Labour Force Survey data by the TUC found that nearly twice as many older workers have left the labour market due to sickness and ill health (97,000) than those who have retired (50,000) during the pandemic.

Many of these may have done their calculations before the recent signs of the significant rise in the cost of living started to become apparent. 

While they may have been confident that they would have sufficient funds to retire comfortably, there will be some who now find their finances more challenged.

Some retirees may now feel the need to downsize, while others may find it more difficult to provide their family with financial support, such as a contribution towards a housing deposit.

The cost of living crisis is continuing to bite. How can mortgage lenders further support borrowers?

Most borrowers (around 75%) do not pay standard variable rates – they’re either on fixed or discounted rates – so it will take some time for rises in interest rates to affect many monthly mortgage repayments.

On top of this, when rates do rise further, the market still remains very competitive, and lenders will in general offer existing customers attractive rates to encourage them to stay rather than re-mortgage with another lender.

For borrowers who do find themselves in financial difficulty, lenders are able to offer a range of options to help manage payments.

The loan term can be extended to make regular repayments smaller and more manageable, or all or part of the loan can be switched to interest-only, on a temporary or permanent basis.

It is very important that borrowers engage with their lenders as early as possible to explain what their issues are – to explore the available options and decide what the best solution would be.

Another way lenders can help is by referring borrowers to expert debt advisers, who can offer help with rescheduling other debts and talking through other ways of cutting down on non-essential expenditure. 

They can also help borrowers make sure they are accessing all relevant benefits and support for which they are eligible.

We’ve seen the Bank of England open a consultation on ditching the affordability test. What are your thoughts?

This is actually something IMLA has been calling for some time. IMLA has been arguing that the combination of FCA MCOB rules, loan-to-income (LTI) limits and the 3% stress test have placed unrealistic demands on borrowers when compared to the rates they have actually been paying, or could expect to pay.

We’re particularly interested in the FPC’s analysis that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against household indebtedness, and this is something that we will be considering carefully as we develop our response to the consultation.

Of course we understand the need to ensure that borrowers do not over-extend themselves and that there is a need for them to have a cushion against rising interest rates and other expenses – but we believe that the rules have been too cautious for too long, and this has prevented a number of people who would otherwise have been expected to join the ranks of homeowners to be left having to rent their homes and miss out on the longer-term financial advantage of owning their own property.

We’ve seen an uptick in the number of green mortgage products. How important are lenders in supporting the UK’s green agenda and are products innovative enough?

The green agenda is becoming much more important to lenders, and all lenders know that significant efforts are going to be needed if the UK is to achieve its net-zero target by 2050. Indeed, we need those efforts to be well thought-out and properly co-ordinated, so that we don’t waste precious resources by rushing off in different directions and doing things which prove to be ineffective or – in some cases – damaging. 

Lenders will need to develop imaginative products which help homeowners pay for adaptations and improvements which will make a difference to their energy consumption. The age and variety of our housing stock means that a variety of approaches will be required.

It may be possible for some really large-scale initiatives to make a big difference to millions of homes – by generating electricity through renewable energy sources, or substituting clean hydrogen for our current gas supplies.

However, these large projects must lie with Government and the energy industries to solve and roll out. 

Individual households can begin to make a difference, but the Government must also be realistic about what it expects individuals to do, and to guard against creating a “cowboys’ charter” where the unwary can be defrauded by the unscrupulous. 

We need real clarity and understanding of what will make an actual difference, and the standards of workmanship and expertise needed to make those changes safely and sustainably. We look forward to hearing more about the Government’s strategy – which is due any time now.

It has become harder to identify vulnerable customers due to the impact of the pandemic. How can lenders support brokers when it comes to spotting and supporting such borrowers?

The financial services sector has done a lot of work in this area and there is much more awareness of what can cause vulnerability and how to deal with it. Having said that, individual borrowers may be very sensitive about being “tagged” as being vulnerable, and lenders have to proceed with caution and tact.

People who feel they are vulnerable need to feel confident enough that they can be frank with their lender and ask for help, and lenders must make sure they pick up on these requests and respond appropriately. 

It’s a delicate balance to strike at times – and lenders also need to be on their guard against unscrupulous individuals who might try to exploit a lender’s goodwill dishonestly. 

We’ve seen the launch of a direct-to-consumer 40-year mortgage product. How do you envisage the role of the mortgage intermediary should the move to lifelong mortgages become a trend?

For years, traditional mortgage products were for 25-year terms. We’ve seen that stretch to 30 years and now beyond. 

However, someone taking out a 40-year mortgage today is likely to go through all sorts of lifestyle changes, including relationships, children, employment, and so on – so what might have been entirely appropriate at the outset may look rather different 10, 20, 30 years down the line. 

Although the underlying mortgage debt may still be there in some shape or form, its size, and the ability of the borrower to service it are bound to change significantly.

This means that borrowers will continue to need expert advice, and it may also mean that they need more “holistic” advice which incorporates their investment and future pension needs, along with how they finance the purchase of their homes.

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