Directors' report
Business review - Our strategy
Competing in attractive markets
We have chosen to compete in markets that have attractive fundamentals. Our core markets (buy-to-let, self-cert and other niche products) each offer good risk-adjusted returns. These products are more complex than mainstream mortgages and the additional expertise required to manufacture and distribute these loans provides the basis for our competitive advantage.
Our chosen markets continue to grow, underpinned by long-term shifts in UK consumer demographics.
The buy-to-let market has two key drivers:
- the continued growth of the private rental sector; and
- the relatively low penetration of buy-to-let loans within this market.
Several factors support the continued strong demand for rental properties, including increased participation in further education, greater labour force mobility, relatively high UK immigration levels, and continuing reductions in average household size. As a result, the private rental sector is forecast to experience growth for at least the next decade, creating a significant opportunity for buy-to-let lending.
Self-cert lending is lending to prime customers with non-standard employment. Growth in this market is supported by strong demographics: steady levels of self-employment, entrepreneurial-based earnings and borrowers with multiple sources of income. We have continued to improve customer choice in this area, creating better value products available to a wider range of people. Whilst we remain comfortable with our participation in this market, during 2007 we have tightened lending criteria and increased pricing in order to contain volumes.
We also selectively compete in other areas of the mortgage market that meet our requirements for risk-adjusted returns, offering products that satisfy specific customer requirements.
As one example, lifetime mortgage lending is currently a small market, but has the potential for significant growth. Housing equity is a very significant, and currently under-utilised, asset in retirement. Our lifetime mortgage products make it possible for customers to make use of this asset without the need to sell their home.
