Specialist mortgage lending depends on more than product design. A lender also needs reliable funding, suitable technology and the capacity to assess cases that fall outside standard criteria.

In March 2023, acquisitions involving Bluestone Mortgages and Kensington Mortgages raised an important question for intermediaries. Would stronger ownership provide greater lending capacity without removing the specialist approach that made those lenders distinctive?

At a Glance

• Barclays completed its acquisition of Kensington Mortgage Company on 1 March 2023.
• Shawbrook announced an agreement to acquire Bluestone Mortgages during March 2023.
• Larger owners may provide funding, capital and operational support.
• Advisers should not assume that ownership changes immediately alter products or criteria.
• The main practical issue is whether specialist underwriting remains available for complex borrowers.
• Mortgage networks can help AR firms understand lender changes, criteria and case-placement options.

Why were specialist mortgage lenders attractive acquisition targets?

Specialist lenders serve borrowers whose circumstances may not fit a standard automated assessment.

These cases can include:

• self-employed applicants;
• clients with complex income;
• borrowers with recent credit problems;
• portfolio landlords;
• limited company applicants;
• customers buying unusual properties.

This market requires experienced underwriting and detailed case assessment. Building those capabilities internally can take time. Acquiring an established lender may give a larger financial institution access to existing systems, employees, distribution relationships and underwriting knowledge.

However, an acquisition is not only about entering a new market. It can also concern funding resilience.

Specialist Lenders

The UK specialist mortgage market is rapidly consolidating, driven by strategic acquisitions. Recent moves by Shawbrook and Barclays exemplify this trend. Shawbrook’s acquisition of Bluestone Mortgages and Barclays’ purchase of Kensington earlier this month highlight significant shifts.

As these financial institutions aim to broaden their portfolios, the sector’s dynamics are set for considerable change. This wave of integration reflects lenders’ growing appetite for diversification. Consequently, brokers are anticipating an increase in such activities across the industry.

Shawbrook finalised its acquisition of Bluestone Mortgages earlier this week. This marks another major milestone for Shawbrook, which previously acquired The Mortgage Lender in 2021. With a strong capital base and an established deposit market presence, Shawbrook is well-positioned to meet rising demand for specialist lending solutions.

Similarly, Barclays recently completed its acquisition of Kensington Mortgages. Industry analysts suggest this move signals a broader strategy by mainstream lenders to enter niche markets. These acquisitions will likely enhance the offerings of the acquired lenders, making specialised mortgage products more accessible to a wider audience.

With these developments, the market appears set for further transformation. Specialist mortgage products are increasingly gaining traction, moving from niche offerings to broader adoption. This trend underscores the importance of innovation and adaptability in the UK mortgage market.

Liz Syms, CEO of Connect for Intermediaries, recently discussed the increasing trend of specialist lender acquisitions. She pointed to notable examples, including OSB and Precise and ColCap’s acquisition of an 80% stake in Molo earlier this year. These transactions highlight a significant shift in the financial market, driven by evolving strategies among key players.

Tough market for specialist lenders

Specialist lenders face significant funding challenges in the current economic climate, as they navigate an increasingly complex landscape. According to Syms, the market remains resilient, but challenges persist. Economic uncertainties have intensified funding difficulties for many niche lenders, making the environment rigorous.

At the February Specialist Lending Event, funding difficulties across the industry were a key topic of discussion. Non-bank lenders, in particular, have been forced to adapt by diversifying their funding sources. Previously reliant on one or two streams, some lenders now utilise as many as 16 to 18 funding streams tailored to specific lending needs.

Speakers highlighted the shrinking availability of securitisation markets, describing them as increasingly difficult to access. However, signs of gradual improvement provide some relief to the sector. Despite these challenges, Syms observed that specific lenders address funding issues by temporarily increasing their rates. This strategy, though effective in stabilising funds, often leads lenders to temporarily price themselves out of the market.

In other cases, some lenders have opted to withdraw, with sure exits becoming permanent. Masthaven’s withdrawal serves as a notable example. Syms suggested that lenders with larger parent companies enjoy greater funding stability, which could benefit advisers and their clients. However, she raised concerns about the potential loss of identity for specialist lenders acquired by larger institutions.

The distinctive criteria specialist lenders bring to the market remain crucial for serving unique borrower needs. While acquisitions may help acquiring banks expand their offerings, Syms hopes these differences are retained to improve profit margins and customer satisfaction.

She emphasised the importance of secure funding lines, noting that successful collaborations should deliver mutual benefits for lenders, advisers, and borrowers. Despite the hurdles, the market shows signs of adaptation and resilience.

A buyer’s market for specialist lenders

The UK mortgage market is shifting towards a buyers’ market, particularly among specialist lenders. This trend marks an important transition in how lenders operate. Meanwhile, non-bank lenders aiming to secure banking licenses face mounting challenges. The path to becoming a bank appears increasingly arduous compared to earlier years.

A lending sector insider who chose to remain anonymous highlighted these difficulties. They observed that regulatory requirements are stricter now than six or seven years ago. Reflecting on the current landscape, they remarked, “The regulatory body has issued many licenses. While some lenders have succeeded, others have struggled to meet expectations.”

Transitioning to a buyers’ market could impact lenders’ strategies. In particular, non-bank lenders may be increasingly seeking banking licenses this year. Additionally, some might opt for partnerships or integrations with established banks to navigate funding challenges. Such moves signal significant adaptations to evolving regulations and market demands.

Ultimately, this shifting landscape represents both challenges and opportunities for lenders. Staying competitive will require careful planning and a proactive approach to regulatory changes. As the mortgage market evolves, lenders must adapt to these trends for long-term success.

Consolidation: The shape of things to come