2020 was a year like no other. So, as we now look forward to 2021, what lessons can the specialist lending sector learn from the last 12 months – and what opportunities lie ahead?

After a promising start to the year, the onset of Covid caused a tsunami of changes that hit the market faster than anything we have ever known. By way of just one example of this rate of change – on 17th March, Rishi Sunak announced a series of initiatives to aid struggling mortgage customers, which included payment holidays and a moratorium on repossessions. By the end of April, one in seven mortgages were covered by the scheme.

Achieving this in just a few weeks required a monumental effort and the vast operational changes to facilitate the requests were a significant financial drain before you even account for the impact of the deferrals on cash flow. This impacted all lenders, of course, but whereas banks were able to access additional government funding to support this activity, non-bank lenders were not. It was a very challenging time and the future, frankly, looked uncertain.

How specialist lenders adapted to a changing market in 2020

With so much in doubt, there was also uncertainty as to how the capital markets would perceive the imposed mortgage payment holidays and the impact of this on future securitisations.

However, despite this uncertainty, specialist lenders remained committed to the market – delivering as much certainty as was possible to brokers and customers within the extraordinarily uncertain environment. The housing market re-opened in May and steadily gathered pace until July when another government announcement served to turbocharge the market with the removal of Stamp Duty Land Tax for many buyers.

This was fortunately accompanied by a sound reassurance in the capital markets and throughout the summer, specialist lenders completed successful securitisations, that enabled them the confidence to increase their lending appetite to help meet the demand from customers.

And so, this set up an interesting dynamic that has characterised the market since. Given that so many people had been financially impacted by Covid, all but the most simple of more applications now needed to be manually underwritten in order to factor in the events of the last year. An automated approach cannot make a pragmatic decision based on how a customer’s income and financial circumstanced have been affected by the pandemic – so mainstream lenders have been taking a more hands-on approach to reviewing more case. Whereas specialist lenders are geared up for individual underwriting, mainstream lenders are not and, as a consequence, we have started to see specialist lenders delivering superior service levels – challenging previous traditionally-held preconceptions about service.

Not all specialists have been successful at maintaining up to date service, but those that have are finding that they are now working with whole new cohorts of brokers who may not have considered using them in the past. At Pepper Money we have been setting new standards as to what brokers can expect from a specialist lender, with turnaround times within 24 hours at every key stage of our application process and even a completion within 16 days of the initial application.

What does 2021 look like for specialist lenders

As we move into 2021, specialist lenders can look back at the last year with a degree of satisfaction that our businesses have undergone the sternest of challenges and continued to deliver for our brokers and our customers.

With a roll-out of vaccinations, we can now look forward to emerging from the pandemic and finding a way out of the economic downturn. But as we do, we know that more customers will have diverse financial circumstances such as irregular employment and missed payments.  Historically, mainstream lenders have constrained their risk criteria emerging from a downturn and so it will be specialist lenders that will be vital to enable customers access to the mortgage market and create more opportunities for financial inclusion.

At the same time, whereas we had no date back in April to understand how people would react to the pandemic, we now have a track record to show how mortgage books have performed. We have closed successful securitisations and we are building pools in confidence that the appetite is there for UK mortgage assets.

2020 was certainly challenging, but specialist lenders have shown the strength and agility to rise to those challenges. We operate in a funding environment that has been through the sternest of tests and continued to function successfully and we now have an opportunity to improve financial inclusion for the millions of people whose finances have been impacted by Covid.

At Pepper Money, we have continued to evolve our product and service proposition throughout the pandemic. We are now working with more brokers than we ever have done before and we have exciting plans to continue to develop the range of solutions we offer to customers – including the roll-out of second charge mortgages under the Pepper Money brand, as we complete the integration of Optimum Credit, which continues to be the market leader in its sector.

In 2020 we learned that specialist lenders could rise to the challenge, and in 2021 we will see them take the front foot in delivering reliable, fast-paced financial services to a diverse range of customers amidst an environment of caution and constrained criteria in the retail sector.

Laurence Morey, Chief Executive Officer at Pepper Money