Buy To Let – Bucking the trend ?

Buy To Let – Bucking the trend ?

However elsewhere on the CML website another report (issued on 15 August) showed who were the largest BTL providers both by new advances in the same period and gross advances since data was collected in 2001. From nowhere Cheltenham and Gloucester (C&G) appeared in 4th place in new lending and 6th place in gross advances. Whilst it is welcome finally to see data input from this well respected brand the distortion that it potentially creates on the market analysis cannot be ignored. The CML does not appear to have made any adjustments against historic figures to provide a “like for like” comparison which is a missed opportunity. It is difficult to estimate with any accuracy what the true market trend was over the period but a decline in the range of 12% to 15% would fit in with the perceived activity levels of other BTL lenders in the new lending tables.

This is still a soft landing for the sector as the domestic mortgage market has experienced much lower activity levels – even the redoubtable Bradford and Bingley conceded in their half year figures that “the whole market slowed markedly in Q4 2004 and Q1 2005.” Their view that “in Q2 2005 the wider market showed steady recovery” is shared by other lenders as professional landlords took a stronger position in the purchase market in the spring. Paragon Group is a dominant player for the larger landlords and in a trading statement issued on 21 September Paragon reported “second half advances will be well ahead of both the first and second half of 2004”.Their results for the full year at 30 September will make interesting reading on 23rd November. 

The most recent barometer of investor confidence was The Property Investor Show at Excel from 23 to 25 September where a record 12,156 visitors attended over the three days – an increase of 21% on 2004. Such shows always attract debate over visitor quality but the fee paying seminars were well attended and exhibitors including the National Federation of Residential Landlords (NFRL), Taylor Woodrow Developments and our own staff reported very good levels of enquiry for genuine transactions – something that was missing in the closing months of 2004. There are no longer any requests to fund properties through Property Investment Clubs which had caused the CML to issue a statement in June distancing its members from the sharp practices of the few.  For once (the Editor may care to note) a government body, in this instance the DTI, moved to close down several such organisations. Whilst some lenders may have seen a downturn in activity in the early months of the year the transactions that have picked up in the summer have been genuinely based on current market values allowing lenders to improve product criteria without compromising credit quality.

The launch of a 3 year fix at 4.99% with a hefty 1.5% fee by The Mortgage Works early in the year was seen as a product of necessity to combat the pressure of yield on interest cover calculations. Lookalike products flooded the market but as yields improved and the August cut in Base Rate reduced the need it was expected that market appetite would similarly decline for this product style – this has not been the case. There now seems to be a market for products that drive down the headline rate with a larger lender fee whilst other lenders are making a virtue of charging a true market interest rate with a flat lender fee (in  the range £499 to £699) which will appeal to the landlord wishing to borrow larger amounts where the impact of a flat fee swings in his favour.

In the BTL boom years of 2001 to 2004 lenders positioned their products on a 3 year timeline whether providing discounts or fixed rates – as property values showed double digit growth this often matched the landlord’s desire to refinance existing properties and release equity for new acquisitions. In a more stable market where more modest capital growth will extend the period before a likely refinancing, lenders have launched well priced lifetime tracker products to encourage landlords to leave their loans in place. This strategy appears to be attracting steady business volumes and opened up the possibility of borrowers taking up longer term rates which was seized upon by Mortgage Express with an impressive 5 year fix at 4.69% with a 1.5% fee. The success of this product cannot be dismissed as a function of its pricing as there are now 3 year offerings at 4.55% with a 1.5% fee from two different lenders. When landlords disclose their rationale for this product selection, it frequently comes down to an “actuarial” view of spreading the fee over the life of the fixed rate and their view that a combined fee and interest rate of 4.99% represents good value.

As the BTL market moves to the end of the year many lenders could be forgiven for thinking that they had weathered the first half of the year and having enjoyed an uplifted second half could plan with renewed confidence for next year.  But the recent statement by Alliance and Leicester that they will be joining the BTL market in 2006 will be welcomed by landlords and has already attracted disparaging comment from BM Solutions whose position would be a logical starting point for A&L’s Head of Intermediary Mortgages, Mehrdad Yousefi, and his product design team. Other lenders should also note that it wasn’t such a long time ago that Mehrdad was an experienced commercial lender in Holborn so he well understands the broader opportunities beyond just vanilla priced products.

There are still slight concerns over the future direction of the housing market if the economy slows further and whilst BTL has shown that in 2005 it can outperform the market generally, BTL lenders will still approach 2006 with a robust stance on credit quality and commercially sensible mortgage products.