Introduction
 
The non-standard mortgage market is well known for generating bigger margins than the mainstream sector. Once tainted with bad publicity, the market is now considered as a niche market to be in. With mainstream players looking to enter new growth markets, the sector is receiving increased attention. Faced with tougher competition, lenders now have to step up their games to secure market share.
 

 
Scope
 
Provides a detailed overview of the UK non-standard secured lending market, that is, mortgages and secured personal loans
 
Sizes the UK non-standard mortgage and personal secured loan markets and presents scenario-based five year forecasts
 
Provides market share data for the major competitors in the non-standard mortgage market
 
Analyzes trends and issues in the UK non-standard secured lending market
 
Highlights
 
Many lenders interviewed for the purpose of this report agreed with the fact that the non-standard borrower is more likely to be someone who, at some point in their life, has experienced a life-changing event such as divorce, temporary unemployment or sickness, which has resulted in a financial blip.
 

 
The growth in the average advance for a secured loan has been a major element in driving the market upward. This figure has risen by an average annual percentage of 19.3 per cent over the past five years, almost twice as fast as the mortgage market.
 

 
2005 has seen various non-standard players adopt a more aggressive approach. A certain number of lenders including Mortgages plc and SPML have publicly announced their business ambitions, for instance, by how much they want to grow, the share of the market they want to occupy and their overall strategy to meet these goals.
 

 
Reasons to Purchase
 
Gives you a competitive edge by providing you with a thorough analysis of the UK non-standard secured lending market
 
Learn what your competitors are doing and adapt your strategies accordingly
 
Draw on Datamonitor's five-year scenario-based forecasts to plan your future strategy with confidence

TABLE OF CONTENTS
 
CHAPTER 1 EXECUTIVE SUMMARY 3
 
Sizing the UK non-standard population in 2004 3
 
Datamonitor estimates that the non-standard population stood at 9.1 million in 2004 3
 
Underlying macro-economic factors ultimately drive the non-standard population 4
 
Social trends also play a key role in driving the non-standard population 6
 
The non-standard population will decline to 8.79 million by 2009 7
 
Overview of the UK Secured Lending Market in 2004 7
 
For more information … 9
 
The Non-standard Secured Lending Market in Context 9
 
The Competitive Landscape of the Non-standard mortgage market 10
 
Forecasting the Non-Standard Secured Lending Market 13
 
CHAPTER 2 INTRODUCTION 30
 
What is this report about? 30
 
Who is the target reader? 31
 
How do you use this report? 31
 
CHAPTER 3 SIZING THE UK NON-STANDARD POPULATION IN 2004 33
 
Introduction 33
 
Defining the non-standard population 33
 
Lending products: altering the dynamics of demand and supply 33
 
Subjectivity is a necessary evil 34
 
Alternative commonly used terms 35
 
Sub-prime is a segment of non-standard 36
 
Report coverage: age and affordability 37
 
Datamonitor estimates that the non-standard population stood at 9.1 million in 2004 38
 
A combination of macro-economic and social factors is responsible for a declining non-standard population 39
 
Underlying macro-economic factors ultimately drive the non-standard population 39
 
Social trends also play a key role in driving the non-standard population 41
 
The non-standard population will decline to 8.79 million by 2009 42
 
CHAPTER 4 OVERVIEW OF THE UK SECURED LENDING MARKET IN 2004 44
 
Introduction 44
 
After 10 years of phenomenal growth, the UK mortgage market slowed in 2004 44
 
2004 started brightly but the mortgage market abated in the second half of the year 45
 
Various factors that have driven the market over the past five years are now softening 47
 
House price growth has slowed following record growth rates 47
 
FTBs remain marginalized despite a cooling market 48
 
Consumer confidence has had a role to play in 2004 49
 
Remortgaging has driven the mortgage market over the past five years but is now leveling off 49
 
The secured personal loans market has finally slowed 50
 
The buy-to-let mortgage market has suppressed the residential mortgage market over the past five years 50
 
‘M-day’ suppressed the market in the latter half of the year 51
 
2005: a tough year ahead for the UK mortgage market 51
 
CHAPTER 5 THE NON-STANDARD SECURED LENDING MARKET IN CONTEXT 53
 
Introduction 53
 
The UK non-standard secured lending market continues to grow despite a decline in the non-standard population 53
 
The non-standard secured lending market is worth an estimated £41.2 billion in 2004 in terms of gross advances 54
 
The non-standard sector continues to outperform the mainstream market and now accounts for 14.1 per cent of total secured lending 56
 
Various factors have driven the non-standard secured lending market in the first part of 2004 58
 
Larger loans and strong remortgaging growth help the non-standard mortgage market hit £35 billion in 2004 65
 
£35.4 billion was advanced in loans for house purchases and remortgaging to non-standard borrowers in 2004 65
 
An increase in average loan sizes rather than the number of loans advanced helped the non-standard market grow in 2004 66
 
Fueled by increased competition, remortgaging grew strongly in 2004 68
 
Further advances and secured loans have grown rapidly over the past ten years, but this looks set to change in 2005 71
 
Further advances and secured loans account for 14 per cent of the non-standard secured lending market 71
 
The non-standard segment now accounts for 17.7 per cent of all further advances and secured personal loans 73
 
The self-employed accounted for the biggest proportion of non-standard customers with a secured personal loan 74
 
A few key factors have triggered the non-standard secured personal loan market 76
 
2005 will be a slower year for non-standard secured loans 80
 
Conclusions 80
 
CHAPTER 6 THE COMPETITIVE LANDSCAPE OF THE NON-STANDARD MORTGAGE MARKET 82
 
The non-standard market is characterized by specialist lenders, which are backed by major financial institutions 82
 
Citigroup was the first major financial services company to identify the potential of the non-standard mortgage market 84
 
Building societies have also increased their presence in the non-standard market, mainly through small players 85
 
The major financial services institutions in the non-standard market rarely operate under their own brand name 87
 
The non-standard mortgage market is dominated by a handful of players 91
 
Almost all the major players have recorded strong growth in 2004 despite a market slowdown in the last quarter of 2004 94
 
Very few players entered the non-standard market in 2004/2005 97
 
The rumour mill: what’s next? 99
 
But mainstream lenders are reviewing their initial position and are becoming an increasing threat to non-standard lenders 100
 
The requirement of a sophisticated risk model has traditionally acted as a barrier to entry but a few mainstream lenders are now willing to reconsider their model 100
 
The fear of a higher risk of mounting bad debt is still acting as a deterrent to the potential entry of mainstream lenders but not for some of them 101
 
More mainstream lenders are entering the near prime sector 104
 
A tougher environment for non-standard players ahead 107
 
The near prime segment will soon become overcrowded 107
 
Average prices are falling, thus impacting on margins 110
 
Remortgaging is on the rise as competitive pressures increase 113
 
Increased competition is impacting on fees structure, thus reducing profitability 114
 
The changing distribution structure offers some new challenges to non-standard lenders 117
 
Ultimately, customer retention will become more of an issue 126
 
Non-standard players are responding in various ways in order to remain competitive 129
 
Customer acquisition strategies: lenders concentrate on increasing their share of the intermediary channel 129
 
Access to cheaper funds: securitization is a common funding method in the non-standard market 135
 
Whole loan sales allow the acquirer to obtain additional assets without any hassle 139
 
Expanding into other specialist markets 140
 
Conclusions 141
 
CHAPTER 7 FORECASTING THE NON-STANDARD SECURED LENDING MARKET 143
 
Introduction 143
 
Datamonitor’s non-standard secured lending forecasts are based on the forecasting scenarios created in the sister report ‘Overview of Non-standard and Sub-prime Lending 2005’ 143
 
The methodology incorporates variation in mortgage penetration 144
 
In Datamonitor’s opinion, the non-standard secured lending market will slow but to a lesser extent than in the mainstream market 145
 
The UK’s secured lending market will decline to £265.1 billion by 2007 before returning to growth 145
 
The non-standard market will fall to a nadir of £38.6 billion in 2006 145
 
Under a best case scenario, the non-standard secured lending market grows at 5.2 per cent per year 151
 
House price growth continues to drive the UK secured lending market skywards 151
 
The non-standard sector does not quite manage to replicate the growth rate witnessed in the mainstream market 151
 
Under a worst case scenario, the non-standard secured lending market will contract significantly 157
 
A ten per cent decline in house prices hits the UK mortgage market 157
 
The non-standard market would be less affected by an adverse economic climate 157
 
Conclusions 162
 
CHAPTER 8 APPENDIX 164
 
Supplementary data 164
 
Data tables relating to Chapter 3 Sizing the UK Non-standard Population in 2004 164
 
Data tables relating to Chapter 4 The Non-standard Secured Lending Market in Context 165
 
Definitions 168
 
Sizing methodology 171
 
Sizing the non-standard mortgage market 171
 
Sizing the non-standard secured loans market 182
 
Research methodology 185
 
Primary sources 186
 
Secondary sources 186
 
Current and future readings 186
 
Current reports 186
 
Future Datamonitor publications 187
 
Relevant links 187
 
Datamonitor’s custom research capabilities 187
 
Retail Banking Team contact details 190
 
How to contact experts in your industry 190
 

 

 

 
LIST OF TABLES
 
Table 1: Gross advances for total secured personal loans split by non-standard and mainstream, 2000 – 2004 73
 
Table 2: Volume of non-standard secured personal loans , 2000 – 2004 78
 
Table 3: Recent competitive developments within the non-standard mortgage market, 2000 – 2004 83
 
Table 4: Building societies with a presence in the non-standard mortgage market, March 2005 86
 
Table 5: Overview of operating niche markets for major specialist lenders, 2005 92
 
Table 6: Specialist non-standard mortgage lenders ranked by total mortgage gross advances, 2001e-2004e 94
 
Table 7: Examples of mainstream mortgage lenders that accept borrowers with minor debt cases, January 2005 105
 
Table 8: New business advanced in 2004, split by near prime and sub-prime, 2004 109
 
Table 9: Non-standard specialists offering tailored remortgaging options to non-standard customers, March 2005 114
 
Table 10: Distribution channels used by a sample of non-standard players, 2005 118
 
Table 11: Forecasted non-standard secured lending market gross advances compared to total secured lending market gross advances under the Datamonitor’s View scenario, 2005-2009f 149
 
Table 12: Forecasted market share of the non-standard secured lending segment under the Datamonitor’s View scenario, 2005-2009f 151
 
Table 13: Forecasted non-standard secured lending market gross advances compared to total secured lending market gross advances under a best case scenario, 2004-2009f 155
 
Table 14: Forecasted non-standard secured lending market share under a best case scenario, 2004-2009f 157
 
Table 15: Forecasted non-standard secured lending market gross advances compared to total secured lending market gross advances under a worst case scenario, 2004-2009f 161
 
Table 16: Forecasted non-standard secured lending market share under a worst case scenario, 2004-2009f 162
 
Table 17: Number of people defined as non-standard compared to standard population, 2000-2004e 164
 
Table 18: UK Non-standard population forecasts according to Datamonitor’s neutral scenario, 2004-2009f 164
 
Table 19: Gross advances for the UK non-standard secured lending market and the number of UK non-standard households, 2000 – 2004 165
 
Table 20: Non-standard mortgage market and mainstream mortgage market gross advances, 2000-2004 165
 
Table 21: Number of loans advanced in the total secured lending market split by non-standard and mainstream, 2000 - 2004 166
 
Table 22: Gross advances, number of loans and average advance value in the non-standard mortgage market, 2000 – 2004 166
 
Table 23: Total non-standard secured lending market split by product lines, 2000 – 2004 167
 
Table 24: Average advance for secured persona loans and mortgages (total for mainstream and non-standard market), 2000–2004 167
 
Table 25: Data required to estimate the number of non-standard households in the UK 173
 
Table 26: UK dwellings by tenure, 1999-2004e 175
 
Table 27: Household tenure, 2004 179
 
Table 28: The percentage of the mortgage market that is accounted for by the non-standard population, 2000-2004 180
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
LIST OF FIGURES
 
Figure 1: The UK non-standard population continues to decline, falling to an estimated 9.1 million in 2004, 200-2004e 4
 
Figure 2: According to Datamonitor’s neutral forecast, the non-standard population will decline to 8.79 million by 2009, 2004-2009f 7
 
Figure 3: The UK mortgage market: ten years of growth, 1994-2003 8
 
Figure 4: New business level in H2 2004 was lower than that of H1 2004, 2003 – 2004 9
 
Figure 5: Gross advances for remortgaging accounted for 40 to 45 per cent of business activities in 2004, 2004 10
 
Figure 6: The near prime segment is becoming more competitive, 2005 12
 
Figure 7: In Datamonitor’s opinion, the non-standard secured lending market will reach £42.3 billion in 2009, 2005-2009f 14
 
Figure 8: Datamonitor’s definition of non-standard 34
 
Figure 9: A certain degree of subjectivity is needed in a definition of the non-standard population because some mainstream lenders are inevitably willing to accept greater risk than others 35
 
Figure 10: Common terms used to refer to the circumstance defined by Datamonitor as “non-standard” 36
 
Figure 11: Sub-prime consumers represent a segment of the non-standard population 37
 
Figure 12: The UK non-standard population continues to decline, falling to an estimated 9.1 million in 2004, 200-2004e 38
 
Figure 13: According to Datamonitor’s neutral forecast, the non-standard population will decline to 8.79 million by 2009, 2004-2009f 43
 
Figure 14: The UK mortgage market: ten years of growth, 1994-2003 45
 
Figure 15: New business level in H2 2004 was lower than that of H1 2004, 2003 – 2004 46
 
Figure 16: House prices have cooled following record growth rates between 2002 and 2003, 1995-2004 47
 
Figure 17: The proportion of loans accounted for by FTBs has fallen to historic lows, while increasing house prices have forced FTBs to borrow at higher income multiples, Q1 2000 to Q3 2004 48
 
Figure 18: The non-standard secured lending market grew in 2004 despite a further decline in the number of non-standard households, 2000-2004 55
 
Figure 19: The non-standard secured lending market continues to grow faster than the mainstream market, 2002-2004 57
 
Figure 20: Drivers specific to the non-standard secured lending has further triggered the market, 2000-2004 59
 
Figure 21: The average loan value in the non-standard secured lending market amounted to £77, 797 in 2004, 2000 to 2004 64
 
Figure 22: Volumes in the non-standard secured lending market have increased at a faster rate than in the whole secured lending market, 2000 – 2004 65
 
Figure 23: Gross advances for house purchase and remortgaging reached £35.4 billion in 2004, 2000-2004 66
 
Figure 24: The average mortgage advance has risen significantly over the past five years, 2000 – 2004 67
 
Figure 25: Growth in mortgage volumes was less healthy in 2004, 2000 – 2004 68
 
Figure 26: Gross advances for remortgaging accounted for 40 to 45 per cent of business activities in 2004, 2004 70
 
Figure 27: The non-standard secured personal loan market grew faster than the non-standard mortgage market, 2000 – 2004 72
 
Figure 28: Individuals who are self-employed or have a CCJ record account for two thirds of the secured loans market, 2004 75
 
Figure 29: The average loan size in the secured personal loan market has grown faster than in the mortgage market, 2000 - 2004 77
 
Figure 30: Debt consolidation is the most common reason for taking a secured loan 79
 
Figure 31: There are a number of large financial companies operating in the non-standard mortgage market through subsidiary brands that they have either acquired or launched themselves, 2005 88
 
Figure 32: New business continued to grow in 2004, 2003e to 2004e 93
 
Figure 33: The light adverse segment is becoming more competitive, 2005 108
 
Figure 34: The price war intensifies in the non-standard market, 2005 112
 
Figure 35: Better rates and product features are most likely to encourage an intermediary to use a lender more often, Nov 2004 121
 
Figure 36: Level of proc fee varies within the industry across product types, 2005 123
 
Figure 37: BM and GMAC-RFC were the first two specialist lenders 130
 
Figure 38: In Datamonitor’s opinion, the non-standard secured lending market will reach £42.3 billion in 2009, 2005-2009f 148
 
Figure 39: Under Datamonitor’s View scenario, the proportion of the non-standard sector within all product lines in the total secured lending market increases slightly by the end of 2009, 2005-2009 150
 
Figure 40: Under an optimistic view, the non-standard secured loan market performs better than the non-standard mortgage market, 2004-2009f 154
 
Figure 41: Under an optimistic view, the non-standard segment loses ground to the mainstream market, 2004-2009f 156
 
Figure 42: Under a pessimistic view, the non-standard secured lending market contracts significantly but a bigger impact is felt in the mainstream market, 2004-2009f 160
 
Figure 43: Share of the secured lending market accounted for by the non-standard sector picks up slightly from 2006, 2004-2009f 162
 
Figure 44: Excluding segments of the population not relevant to an estimation of the UK non-standard mortgage market 172
 
Figure 45: Methodology used to calculate the number of non-standard households in the UK 173
 
Figure 46: Households eliminated in Datamonitor’s estimation of non-standard households with a mortgage 174
 
Figure 47: The self-employed population is over three times more likely to have a mortgage that the unemployed population, 2003 176
 
Figure 48: ‘DE’ households are easily the least likely socio-economic group to own their property with a mortgage, 2003 177
 
Figure 49: Compared to the mainstream market, a much greater proportion of non-standard households are rented from local authorities and far fewer are owned with a mortgage, 2004 178
 
Figure 50: The average mortgage loan advanced to self-employed borrowers is actually higher than the average advance across the UK mortgage market as a whole, 2003 182
 
Figure 51: Individuals who are self-employed or have a CCJ record account for two thirds of the secured loans market, 2004 185
 
Figure 52: Datamonitor’s core consulting capabilities 189