Many building societies will be aware of various sophisticated financing structures designed to allow for greater market reach, but might the well-trodden path of forward flow funding now be even more viable?

Following the recent FCA call for evidence on the MCOB interest rate stress test rule, and its upcoming consultation on simplifying the remortgaging and mortgage variations process, we would argue not only has it made forward flow funding a more attractive option to increase societies’ own lending capacity, it has provided a real opportunity for societies to both help customers otherwise outside their credit appetite, and promote homeownership in their local areas.  Taking one of our recent transactions supporting Penrith Building Society as an example, we explore why now might be the time to give forward flow funding a close look. 

Forward Flow Funding

At its most basic, a forward flow funding structure is one where a financing party (often referred to as the funder) agrees to purchase newly created loans that fit a pre-agreed set of criteria at a pre-agreed price on a periodic basis from a counterparty (often referred to as the originator) – hence the forward commitment to purchase a flow of loans.  

Typically, the beneficial title in the loans will transfer to the funder on or around the date that each loan is originated, whilst the legal title and servicing of the loans will remain with the originator (until the occurrence of a “perfection event”). This may be contrasted with a back book sale, where the originator is already holding a portfolio of existing debts at the time they are seeking to sell, rather than selling loans which they will originate in the future.

The mortgage lender is particularly well placed to exploit this market. Some market participants will only ever be funders whilst others only ever originators, but mortgage providers have the flexibility to take advantage of both roles. 

Why Forward Flow Funding? Penrith Building Society, an example

Forward flow funding offers a number of benefits for the mortgage provider. When it takes the role of originator, it gets the dual benefit of receiving funding that is “off balance sheet” and therefore cheaper, whilst also being able to charge a fee for its participation (i.e. an origination fee and servicing fee) and potentially share in some of the upside, depending on the commercial terms.

At a time when the finance industry is undergoing profound changes driven by FinTechs, challenger banks, other innovators and the promise of AI, we would argue the standout benefit is an opportunity for traditional lenders, like building societies, to take the role of funder, partner with these market disruptors and put their financial heft behind these new ideas.

This is exactly what Penrith Building Society did when it teamed up with Generation Home, an originator at the leading edge of finding new ways to expand the purchasing power of prospective homeowners. 

Under their arrangement which was entered into in December 2024, Penrith will fund first-ranking, owner-occupied residential mortgages originated by Generation Home on properties in Cumbria – Penrith’s home turf - where it is working to support those looking to buy homes in their local community. Generation Home offers innovative mortgage products aimed at first-time buyers, which enhance affordability by allowing friends and family to add their income to the mortgage or make a loan towards the deposit.

This is not the first time this structure has been used; indeed, Penrith’s involvement builds on Generation Home’s existing arrangement with Nottingham Building Society, under which Nottingham has committed to provide Generation Home with up to £600 million over a minimum of 2 years.

Why now?   

On top of the existing benefits of forward flow funding, proposed changes to the interest stress testing rules and the potential proposals to make remortgaging easier (and allow mortgage variations such as term reductions, and reviews of customer options, without the need for regulated advice) mean that now is a propitious time for societies looking to expand their offering by considering whether forward flow might work for them.  Also, for originators looking to increase their book in light of the stress test changes, forward flows maximise that ability which would otherwise have to be met from customer deposits.

For societies looking to increase funding generally, but facing constraints based on their credit criteria, forward flows afford the opportunity to indirectly increase funding to the housing market in their geographical target area, but potentially without breaching those criteria. 

As with any transaction, there will be legal and regulatory issues to consider, and some of these will be more specific to forward flow funding such as whether the funder could be considered a “co-manufacturer” for Consumer Duty purposes.

However, these are all points that we have helped clients successfully navigate and so should not be something to be overly concerned about – the key is simply to get advisers involved at the right point in the process.