UK Mortgages 2010

Introduction
The UK Mortgage Market has been through a lot in the past two years. With the worst of the recession now over, funding is starting to return, house prices have stabilised and lenders are regaining confidence. However, with austerity measures on the way and a raft of proposed regulatory changes, the road to recovery is set to take some time.

Features and benefits
Combines all of the mortgage research conducted in 2010 into one comprehensive document.
Provides market sizing data, market shares, key trends, in-depth analysis of the buy-to-let sector, mortgage arrears and consumer trends.
Includes detailed qualitative opinion and quantitative forecasts of the UK mortgage market for the next five years.
Highlights
Datamonitor predicts that total gross lending stay fairly flat, reaching £153.7 billion in 2011 , before a more rapid recovery begins in 2012.

Datamonitor’s research confirms that arrears are not, at this stage least, a significant problem. Only 1% of mortgage holders questioned said that they had missed more than three payments over the previous 12 months. In contrast, 9% said they were overpaying to clear their balance more quickly.

Santander was one of the best performers of 2009, as its share of gross lending rose from 14% in 2008 to 18% in 2009. This further increased to 20% in the first quarter of 2010, compared to 15% in Q1 2009. Similarly, HSBC’s share of the market rose more than three-fold, making it the biggest improver over this period.

Your key questions answered
What is the overall state of the mortgage market, and how can my business plan ahead for future developments?
How are other mortgage competitors faring in this difficult market, what new lenders do we need to look out for?
When will mortgage funding improve, and how can we manage arrears and reposessions effectively?

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TABLE OF CONTENTS
Overview 1
Catalyst 1
Summary 1
A Review of 2009 and Outlook for 2010-11 13
The market was in turmoil at the start of 2009, but ended the year in slightly better shape 13
Gross lending in the UK mortgage market showed signs of a tentative recovery in Q2 2010 24
Activity in the housing market remains close to an historically low level 28
Regulatory change and competitive pressures will have an impact on market performance in the near future 33
Datamonitor expects slow growth in gross lending in 2010 before a more pronounced recovery in 2011 38
Competitive Dynamics: Market Overview 43
Changes in market share reflect the contrasting fortunes of the leading lenders 43
Growth in outstanding balances has come to a virtual halt 44
Banks have strengthened their dominance of the mortgage market 46
The ability of building societies to lend has been hampered by market conditions 48
Specialist lenders have endured a sudden collapse after several years of rapid expansion 51
Competitive Dynamics: Lender Developments 54
The leading providers all witnessed falls in gross lending in 2009 54
Building societies have come under intense pressure over the last 12 months 56
Specialist lenders are beginning to re-enter the market 61
The emergence of new providers could lead to greater competition 63
Product Developments and Innovation 66
The availability and cost of mortgages is gradually starting to recover 66
Mortgage providers are once again starting to innovate 74
Providers are using mortgages to promote loyalty and cross-sales 78
Overseas lenders can act as a source of new ideas for UK providers 81
First-time buyers: improving affordability 82
Niche segments: catering to neglected consumers 87
Flexibility: repayment options to suit different types of borrower 89
Distribution and marketing: forming strategic partnerships 94
Product design: rewarding loyalty 97
Technology: exploiting the internet 100
Buy-to-Let Mortgages and the Rental Sector 103
The buy-to-let market experienced a significant contraction in 2009 103
Several factors are responsible for shaping the current market 114
The buy-to-let market will gradually recover over the next few years 119
Funding Issues in the Mortgage Market 138
UK mortgage funding has been severely affected by developments over the last two years 138
Reduced money-market funding directly led to a collapse in the supply of mortgages 141
Lenders will have to maintain their reliance on retail deposits for the time being 153
Mortgage Arrears and Possessions 164
The climate for arrears and possessions has proved to be more benign than expected 164
The prospects for arrears and possessions beyond 2010 are uncertain 172
Several factors have combined to keep arrears and possessions at manageable levels 178
Research by Datamonitor confirms that arrears are currently an isolated problem 188
Some lenders have been more affected by arrears than others 192
APPENDIX 200
A Review of 2009 and Outlook for 2010-11 200
Competitive Dynamics: Market Overview 211
Competitive Dynamics: Lender Developments 218
Product Developments and Innovation 223
Buy-to-Let Mortgages and the Rental Sector 228
Supplementary data 236
Definitions 247
Methodology 247
Further reading 247
Ask the analyst 247
Datamonitor consulting 247
Disclaimer 247


TABLE OF FIGURES
Figure 1: Gross lending in 2009 was 60% lower than in 2007 13
Figure 2: Gross lending for purchases bottomed out in 2009, but remortgaging fell sharply 15
Figure 3: Data from the Bank of England highlight the depth of the fall in remortgaging activity 16
Figure 4: Mortgage credit availability has improved slightly since the first quarter of 2009 17
Figure 5: Gross lending by specialist lenders has collapsed over the last two years 19
Figure 6: The issuance of mortgage-backed debt has virtually dried up over the last two years 20
Figure 1: Gross lending in Q2 2010 saw a moderate improvement on the level seen in Q2 2009 24
Figure 2: Monthly lending in 2010 has remained at around the same level as 2009 25
Figure 3: House purchase has had a larger impact on gross lending in the mortgage market in Q2 2010 29
Figure 4: Annual house price growth declined during the second quarter of 2010 30
Figure 5: House price expectations have increased the availability of secured credit in the last few quarters 31
Figure 6: Conditions in secured credit funding improved in Q2 2010 32
Figure 7: The percentage of borrowers in arrears is trending downwards 33
Figure 8: On average two-year fixed deals are the best in the market 35
Figure 9: Capital and interest mortgages have grown their share of the overall mortgage market 37
Figure 10: Datamonitor forecasts that gross lending will grow to £253 billion in 2014 38
Figure 11: Datamonitor's optimistic scenario forecasts gross lending to reach £290 billion in 2014 40
Figure 12: Datamonitor's pessimistic scenario forecasts gross lending to reach £220 billion in 2014 41
Figure 3: Santander, RBS and HSBC all claimed markedly larger shares of the market in 2009 44
Figure 4: LBG and Nationwide have both seen their mortgage books contract in value 45
Figure 5: Banks were the only type of lender to see outstanding balances rise in 2009 46
Figure 6: In 2009 building societies experienced a net outflow of retail deposits for the first time since records began in 1955 49
Figure 7: Building societies have failed to increase market share 51
Figure 8: Gross lending by specialists has collapsed since the onset of the banking crisis 52
Figure 9: LBG saw the biggest fall in gross lending of the top providers in 2009 56
Figure 10: The total number of buy-to-let products remains low 63
Figure 11: The number of mortgage products has increased slightly over the last 12 months 67
Figure 12: High LTV lending has been restricted since mid 2008 68
Figure 13: The availability of LTV mortgages at above 90% has gradually improved since mid 2009 69
Figure 14: The cost of two-year fixed rate mortgages is falling 72
Figure 15: Margins have been gradually shrinking over the last six months 73
Figure 16: HSBC is marketing a combined fixed and variable rate mortgage 75
Figure 17: John Charcol offers an alternative to traditional fixed rates 77
Figure 18: Many of Nationwide’s best deals are only available to its current account holders 79
Figure 19: Lloyds TSB and Halifax offer preferential mortgage rates to their bank account customers 80
Figure 4: Since the mid-1990s the affordability of first-time mortgages has halved 82
Figure 5: First-time buyer deposits have sharply escalated since the late 1990s 83
Figure 6: Lloyds TSB is heavily promoting its Lend A Hand mortgage in the press 85
Figure 7: Standard Chartered in Hong Kong offers several different options for repayment 90
Figure 8: Westpac New Zealand borrowers can split their mortgage between fixed and variable rates 93
Figure 9: Garanti Bank boasts an integrated property portal 95
Figure 10: Several Australian banks offer packaged bundles of products at preferential rates 98
Figure 11: Santander offers a fee-free current account exclusively to its mortgage holders 99
Figure 12: Google has entered the mortgage comparison market 101
Figure 1: Buy-to-let gross lending fell drastically between 2007 and 2009 104
Figure 2: The decline in buy-to-let lending activity accelerated in the third quarter of 2008 105
Figure 3: 75% of mortgage intermediaries experienced a fall in buy-to-let gross advances in 2009 106
Figure 4: Buy-to-let advertising activity ground to a halt in 2009 107
Figure 5: The number of buy-to-let products has stagnated since May 2008 114
Figure 6: Arrears on buy-to-let mortgages have generally been lower than for the market as a whole 116
Figure 7: Repossession rates on buy-to-let mortgages have matched those for all mortgages 117
Figure 8: Buy-to-let lending is unlikely to rise or fall sharply in the foreseeable future, according to brokers 120
Figure 9: More letting offices reported seeing landlords buy property than sell in 2009 122
Figure 10: The proportion of letting offices reporting more tenants than properties recovered in 2009 124
Figure 11: Only around one in 10 letting offices saw an increase in achievable rents in 2009 125
Figure 12: Fewer letting offices saw an increase in rental supply due to an inability to sell properties in 2009 126
Figure 13: In Datamonitor’s view, buy-to-let gross advances will rise to £25.6 billion by 2014 134
Figure 14: Buy-to-let gross advances will reach £35 billion in 2014 under the optimistic forecast 135
Figure 15: The pessimistic forecast sees buy-to-let gross advances reaching £11.5 billion in 2014 137
Figure 1: RMBS public issuance fell away sharply in late 2007, and remains at negligible levels 139
Figure 2: Retained RMBS issues have almost completely replaced public issues 141
Figure 3: Throughout 2008, lenders stated that wholesale conditions were driving reduced credit availability 142
Figure 4: Quarterly changes in mortgage credit availability 143
Figure 5: The number of available mortgage products fell steeply in late 2007 and 2008 144
Figure 6: There was a sharp fall in the maximum LTVs available in 2008 145
Figure 7: The number of available 90%-plus LTV mortgage products collapsed in early 2009 146
Figure 8: Lending criteria tightened and loan approval rates fell drastically during the credit crunch 147
Figure 9: Spreads on mortgages rose significantly from late 2007 through to mid-2009 148
Figure 10: Spreads on variable rate mortgages ballooned in 2009 149
Figure 11: Gross lending by specialist lenders collapsed in 2008 151
Figure 12: Self-certification mortgages have been completely unavailable since November 2009 152
Figure 13: Banks’ share of gross lending has significant increased during the funding crisis 154
Figure 14: Building society retail deposits fell in 2009 for the first time since records began in 1955 156
Figure 15: New issues of mortgage covered bonds in UK grew threefold between 2007 and 2008 160
Figure 16: Growth in retail deposits has slowed down since the base rate fell to a record low 161
Figure 17: The funding gap between customer loans and deposits rose to 30% by 2007 162
Figure 1: The number of possessions in 2009 came in considerably below expectations 165
Figure 2: Arrears also ended the year below forecasts 166
Figure 3: Arrears and possessions have risen significantly since the start of the downturn 167
Figure 4: Arrears are rising faster based on months outstanding rather than as a proportion of total balance 168
Figure 5: Arrears peaked in the second quarter of 2009 before gradually falling 169
Figure 6: The number of possessions on mortgaged properties fell over the course of 2009 170
Figure 7: There has only been a fall in mortgages that are less than 5% in arrears 171
Figure 8: Loss of income is by far the biggest factor driving arrears 172
Figure 9: Following 12 months of improvement, lenders are expecting defaults and losses to start rising 174
Figure 10: The number of mortgages in arrears will reach 239,100 in 2014 in Datamonitor’s view 176
Figure 11: The non-standard population will peak in 2012 177
Figure 12: The sub-prime population will rise up to 2013 before starting to fall 178
Figure 13: Possession actions on mortgaged properties fell sharply in late 2008 180
Figure 14: Formal arrangements to repay arrears rose rapidly throughout 2008 183
Figure 15: Possessions are considerably below the levels experienced during the 1990s 184
Figure 16: The MRS has provided help for a limited number of households 185
Figure 17: Over half of borrowers in arrears contacted their lender before or as soon as they got into difficulty 187
Figure 18: Only a small proportion of borrowers are in significant arrears at present 189
Figure 19: The likelihood of arrears rises in line with the lack of affordability 190
Figure 20: All social classes have proved equally susceptible to missed payments 191
Figure 21: Summary of lenders’ mortgage books in 2009 192
Figure 22: The arrears rates of the major providers are either in line with or below the market average 193
Figure 23: Barclays and Nationwide enjoy the lowest LTVs on their mortgage books 194
Figure 24: LBG has had to make the largest provision for impairments 196
Figure 25: Nationwide’s Mortgage Charter outlines the help that it will provide to homeowners in difficulty 198


TABLE OF TABLES
Table 1: Forecast gross lending under the Datamonitor scenario 39
Table 2: Forecast gross lending under the optimistic scenario, 2010f–14f 40
Table 3: Forecast gross lending under the pessimistic scenario, 2010f–14f 42
Table 4: The number of building societies in the UK continues to decline 57
Table 5: Variable rates offered by main buy-to-let lenders, June 2009 to March 2010 108
Table 6: Maximum LTVs offered by main buy-to-let lenders, June 2009 to March 2010 109
Table 7: Fees charged by main buy-to-let lenders, June 2009 to March 2010 109
Table 8: Minimum advances offered by main buy-to-let lenders, June 2009 to March 2010 110
Table 9: Maximum advances offered by main buy-to-let lenders, June 2009 to March 2010 111
Table 10: Maximum portfolios allowed by main buy-to-let lenders, June 2009 to March 2010 111
Table 11: Eligibility of first-time buyers by main buy-to-let lenders, June 2009 to March 2010 112
Table 12: Buy-to-let lenders listed by Moneyfacts, March 2010 113
Table 13: Forecast buy-to-let gross advances under the Datamonitor view, 2010–14 134
Table 14: Forecast buy-to-let gross advances under the optimistic view, 2010–14 136
Table 15: Forecast buy-to-let gross advances under the pessimistic view, 2010–14 137
Table 16: Forecasts for the number of mortgages more than three months in arrears, 2010–14 176
Table 17: UK gross annual lending (£m), 2003–09 200
Table 18: Gross mortgage lending by product line, 2004–09 200
Table 19: Net balance of lenders reporting increase in demand for remortgage credit 201
Table 20: Net balance of lenders reporting improvements in credit availability and credit scoring criteria 201
Table 21: Index of gross lending by specialist lenders and MFIs (Jan 1994 = 100) 202
Table 22: Public issuances of residential mortgage-backed securities (£ billion) 204
Table 23: Monthly and annual changes in house prices, January 2007–January 2010 205
Table 24: Net balance of lenders reporting that an increase in house prices is boosting credit availability 206
Table 25: Interest rates on fixed-rate mortgages 207
Table 26: Net balance of lenders reporting an increase in mortgage availability 208
Table 27: Net balance of lenders reporting an increase in maximum LTVs 208
Table 28: Average size of deposits paid by first-time buyers, January 2007–December 2009 209
Table 29: Comparison of interest rates, 2007–10 210
Table 30: Arrears and repossessions, 2004–09 211
Table 31: Share of total gross lending, 2008–09 211
Table 32: Total number of mortgage products, February 2007–July 2010 212
Table 33: Outstanding mortgage balances (£bn), by provider, 2008–09 213
Table 34: Outstanding balances (£bn) by type of provider, 2000–09 213
Table 35: Net change in building society retail deposits (£m), 1955–2009 215
Table 36: Share of gross lending by type of lender, 2000–09 216
Table 37: Index of gross lending by specialist lenders and MFIs (January 1994 = 100) 217
Table 38: Gross mortgage lending (£bn), 2008–09 218
Table 39: Total number of buy-to-let mortgage products, March 2007–July 2010 219
Table 40: Distribution of LTVs on gross lending (percentage of new lending by value) 220
Table 41: Total number of LTV mortgages at above 90%, August 2008–July 2010 221
Table 42: Average quoted rate on two-year fixed rate mortgages (%), February 2007–June 2010 222
Table 43: Distribution of margins above base rate on gross lending 223
Table 44: Percentage of dwellings in the UK that are owner occupied 223
Table 45: Owner occupation rates across Europe in 2008 225
Table 46: UK gross annual lending (£m) 225
Table 47: UK first-time buyer affordability index 226
Table 48: Size of median deposit paid by first-time buyers (£) 228
Table 49: Annual buy-to-let gross advances, 1999–2009 228
Table 50: Quarterly buy-to-let gross advances, 2006 Q3 to 2009 Q4 229
Table 51: Changes in gross advances handled by intermediaries between 2008 and 2009 (%) 229
Table 52: Percentage of mortgages more than three months in arrears (%) 229
Table 53: Percentage of mortgages taken into possession (%) 230
Table 54: Sales prospects for mortgages over next two years 230
Table 55: Proportion of landlords who are buying and selling properties (%) 232
Table 56: Proportion of letting offices reporting more tenants than properties (%) 233
Table 57: Proportion of letting offices reporting an increase in rental supply due to an inability to sell properties (%) 233
Table 58: Proportion of letting offices reporting that achievable rent levels have increased (%) 234
Table 59: Advertising spend on buy-to-let mortgages, 2007–08 234
Table 60: Total number of available buy-to-let products 235
Table 61: Forecasts for the number of possessions in 2009 versus actual 236
Table 62: Forecasts for the number of mortgages at least 2.5% in arrears in 2009 versus actual 236
Table 63: Annual arrears and possessions 236
Table 64: Comparison of arrears by number of months outstanding and by percentage of outstanding balance 236
Table 65: Mortgages more than 2.5% in arrears 237
Table 66: Properties taken into possession 238
Table 67: Mortgages in arrears (%), by balance in arrears 238
Table 68: Factors causing mortgage arrears 239
Table 69: Net balance of lenders reporting increases on default rate and losses on secured loans 239
Table 70: Size of non-standard population, 2009–14 240
Table 71: Size of sub-prime population, 2009–14 240
Table 72: Possession actions on mortgaged properties 240
Table 73: Number of formal arrangements and temporary concessions 242
Table 74: Comparison of number of possessions between current downturn and previous downturn 242
Table 75: Applications under Mortgage Rescue Scheme 243
Table 76: Stage at which borrowers in difficulty contacted their lender 243
Table 77: Repayment history over the last year (%), by size of mortgage 244
Table 78: Borrowers who have missed at least one payment in the last 12 months (%), by affordability 244
Table 79: Borrowers who have missed at least one payment in the last 12 months (%), by socioeconomic group 245
Table 80: Mortgages more than three months in arrears at the end of 2009 (%) 245
Table 81: Average LTVs on new and existing mortgages in 2009 (%) 245
Table 82: Impairment allowances in 2009 246


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