Since the 2008 US mortgage crisis, which led to one of the world’s worst economic downturns, traditional high street banks have taken a step back from the mortgage market. They will still provide vanilla style mortgages, and some will venture into more risky areas, but regulations and affordability calculations have effectively straitjacketed traditional banks. Over the last decade this left a significant liquidity gap which has to a certain extent been filled by private banks. Will private banks continue to increase their market share going forward?
Attractions of private banks
The main attraction of private banks is the fact that they are more flexible and can take a look at the broader picture regarding mortgage applications. They will also take on more complex non-traditional applications where there may be different income streams from around the world in a variety of currencies. Private banks will also take into account the overall wealth of an individual and there is no affordability test as such, as everything is relative.
Assets under management
What you will tend to find is that private banks will look towards assets under management arrangements as part of a mortgage funding agreement. This will effectively see high net worth individuals transferring a pre-agreed level of funds/assets to the asset management division of the private bank. There are a number of reasons for this particular approach:
• Some private banks offer attractive introductory mortgage rates to tempt customers and then develop long-term relationships
• These long-term relationships will often extend to additional services offered by private banks
• The assets under management also act as an insurance policy in the event that an individual suffers financial hardship further down the line
It is worth noting that the majority of private banks will be introductory only which means you will need to go through a well-connected mortgage broker to secure what are often bespoke arrangements. Many people are critical of the charging structure of mortgage brokers but in reality for those with a more complex financial background they can often be the only route to private banks and niche lenders.
Will traditional banks fightback?
While there have been signs that some traditional high street banks have been loosening their mortgage funding criteria, there is only so much they can do within the current regulations and affordability calculations. In many cases they are still the first port of call for so-called vanilla mortgage applications but for more complex scenarios private banks and niche lenders are now becoming the natural first port of call. This is paying into the hands of mortgage brokers, who also work in a very competitive sector, and certainly work for their money.
Until the regulations covering high street banks are watered down/diluted it is difficult to see a scenario where private banks/niche lenders will not continue to increase their market share.
If we look back a decade ago the vast majority of people would have been unaware of private banks and niche lenders – more focused on high street banks. The situation has changed for many mortgage applicants as house prices continue to rise and financial situations become more complex. This has opened the door for private banks and niche lenders although traditionally they tend to be an introductory only service.
History shows that the UK banking sector tends to move in cycles. As a consequence, it may be little too soon to write off traditional banks when comparing and contrasting with private banks/niche lenders. However, it does feel as though we are experiencing a significant shift in the power and influence of various bodies in the UK mortgage sector.