UK Mortgages 2010: Mortgage Innovation

Introduction

With the worst of the credit crunch behind them, UK lenders can start shifting their focus to product innovation, looking abroad for inspiration. This brief looks at overseas mortgage innovations, and discusses their applicability to the UK market.

Scope

*Provides examples of mortgage innovations from around the world.

*Discusses the suitability and relevance of similar innovations to the UK market.

*Assesses how providers are responding to the differing needs of specific market segments.

Highlights

Standard Chartered in Hong Kong and Malaysia makes it easier for first-time buyers to step onto the housing ladder by allowing third parties, such as parents, to offset their savings against borrowers' mortgages.

Several overseas lenders offer hybrid mortgages where part of the loan is on a fixed rate, and the remainder on a variable rate. These products allow borrowers to benefit from falling rates, while at the same time enjoy a degree of security.

Ulster Bank promotes a scheme where consumers who take out one of their mortgages to buy a home from a list of specified developments will receive up to a 15% refund on the purchase price, should the value of the property have declined over the first five years of ownership.

Reasons to Purchase

*Keep up-to-date with the latest product developments in mortgage lending.

*Gain an insight into how innovations in the mortgage market abroad might work in the UK.

*Understand where there are gaps in the market that can be exploited.


Report Highlights
Standard Chartered in Hong Kong and Malaysia makes it easier for first-time buyers to step onto the housing ladder by allowing third parties, such as parents, to offset their savings against borrowers' mortgages.

Several overseas lenders offer hybrid mortgages where part of the loan is on a fixed rate, and the remainder on a variable rate. These products allow borrowers to benefit from falling rates, while at the same time enjoy a degree of security.

Ulster Bank promotes a scheme where consumers who take out one of their mortgages to buy a home from a list of specified developments will receive up to a 15% refund on the purchase price, should the value of the property have declined over the first five years of ownership.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
A summary of the most notable mortgage innovations 2
The Datamonitor view of the future of the UK mortgage market 2
Lenders will find new ways to address the needs of disadvantaged groups such as first-time buyers and the self-employed 2
Mortgages will become more individualized to cater to an ever more segmented market 3
Mortgages will be used as a weapon in the battle to build customer loyalty 3
The UK mortgage market has been battered by the credit crunch 3
There is scope for an increase in home ownership rates and mortgage penetration in the UK 3
Owner occupation in the UK has hovered around 70% for the last few years 3
The home owning culture is well-established across much of Europe 4
The collapse in gross mortgage lending has helped to stifle development and innovation 5
Extremely low levels of remortgaging have removed the incentive for lenders to bring out new products 6
Regulators are planning further restrictions on the sale of certain types of mortgage 7
Defining innovation in the mortgage market 7
Overseas lenders can act as a source of new ideas for UK providers 7
First-time buyers: improving affordability 8
Some lenders allow for third party contributions to address affordability issues 8
Before the downturn, providers responded by requesting proportionately smaller deposits 9
Standard Chartered enables Far Eastern borrowers to put family members' savings towards their mortgage 9
Lloyds TSB allows UK borrowers to use third party contributions for house purchases 10
Other UK providers have started to offer guarantor mortgages 11
The Retail Banking team view: mortgages that enable third party contributions and guarantees could become the norm for first-time buyers 12
Ulster Bank offers protection against the risk of falling house prices 12
The Retail Banking team view: mortgages that protect against price falls could entice first-time buyers looking for peace of mind 12
Niche segments: catering to neglected consumers 13
SRB arrangements seek to counter bad publicity 13
RPS has introduced an SRB product in line with FSA proposals 14
The Retail Banking team view: RPS' offering heralds a long overdue clean-up of the SRB market 14
Self-certification mortgages are to be banned 14
Business offset mortgages, similar to those offered by ANZ, could plug the gap 15
The Retail Banking team view: business offset mortgages could help to facilitate the return of lenders to this market 15
Flexibility: repayment options to suit different types of borrower 15
Overseas lenders offer a wide range of repayment options that go far beyond what is available in the UK 15
Standard Chartered bank in Hong Kong provides a variety of innovative repayment options 15
TSB Bank of New Zealand offers flexibility on frequency of repayment 17
The Retail Banking team view: increased repayment flexibility could appeal to those looking for a tailored product 17
Westpac New Zealand allows borrowers to hedge their bets between fixed and variable rates 17
The Retail Banking team view: borrowers could appreciate the 'best of both worlds' approach of hybrid mortgages 18
Distribution and marketing: forming strategic partnerships 19
Some intermediaries have formed alliances with lenders and aggregators to sell mortgages 19
John Charcol entered into a tie-up with HSBC to offer impartial advice to the bank's customers 19
London & Country has formed partnership with Moneysupermarket.com 19
The Retail Banking team view: partnerships could help safeguard the future of mortgage brokers 19
Garanti Bank in Turkey offers a one-stop shop for choosing and buying a house 20
The Retail Banking team view: potential borrowers could be attracted by the simplicity afforded by the integration of property search and property finance 21
Product design: rewarding loyalty 21
Many lenders offer preferential rates on mortgages and other products in return for an annual fee 21
The Retail Banking team view: packages can help to promote customer loyalty 23
Santander is starting to encourage loyalty through the introduction of its Zero account 23
The Retail Banking team view: Santander's move could help to boost its share of the mortgage market 24
National Irish Bank offers borrowers the chance to benefit from rising property prices 24
The Retail Banking team view: products like this can help to improve customer retention rates 24
Technology: exploiting the internet 24
Google moves into the US mortgage market 24
The Retail Banking team view: Google's initiative will have only a limited impact on the UK market 25
APPENDIX 27
Supplementary data 27
Definitions 31
Bank of England base rate - otherwise known as the Bank of England's 'repo rate'. Changes to the Bank of England base rate are announced by the Bank of England's Monetary Policy Committee. 31
Balances outstanding - the value of loans outstanding at a given point in time, usually at year-end. 31
Gross advances - the value of loans made over a period of time. 31
Methodology 31
Further reading 31
Ask the analyst 33
Datamonitor consulting 33
Disclaimer 33
List of Tables
Table 1: Percentage of dwellings in the UK that are owner occupied 27
Table 2: Owner occupation rates across Europe in 2008 28
Table 3: UK gross annual lending (£m) 28
Table 4: UK first-time buyer affordability index 29
Table 5: Size of median deposit paid by first-time buyers (£) 31
List of Figures
Figure 1: The owner occupation rate in the UK rose steadily in the1980s and 1990s 4
Figure 2: Home ownership in the UK is much lower than in many European countries 5
Figure 3: Gross lending fell by a third in 2008, and by nearly half in 2009 6
Figure 4: Since the mid-1990s the affordability of first-time mortgages has halved 8
Figure 5: First-time buyer deposits have sharply escalated since the late 1990s 9
Figure 6: Lloyds TSB is heavily promoting its Lend A Hand mortgage in the press 11
Figure 7: Standard Chartered in Hong Kong offers several different options for repayment 16
Figure 8: Westpac New Zealand borrowers can split their mortgage between fixed and variable rates 18
Figure 9: Garanti Bank boasts an integrated property portal 20
Figure 10: Several Australian banks offer packaged bundles of products at preferential rates 22
Figure 11: Santander offers a fee-free current account exclusively to its mortgage holders 23
Figure 12: Google has entered the mortgage comparison market 25

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