Achieving Buy to Let Lending Ambitions in 2005

Achieving Buy to Let Lending Ambitions in 2005

The slowdown in the housing market in the closing months of 2004 and the sluggish activity in the early months of 2005 inevitably predetermine the activity of the Buy to Let (BTL) sector, as their fortunes are inexorably interlinked.

This has already been evidenced by the Council of Mortgage Lenders BTL figures for the closing half of 2004 which, at £9.8 billion of new lending, were 18% lower than the £12 billion in the first half of the year and 16% lower than the £11.6 billion in the second half of 2003.

On the plus side, it was good to note that arrears at 0.63% at 3 months or more, were lower than the 0.8% figure for all mortgages generally.

Long before these figures became available on 14th February, most BTL lenders had already set and announced their expectations and aspirations for new lending in 2005.  It almost seems comical now to recall the bold statements of “whatever the market, we will increase our new lending figures year on year”, as such expectations could only ever have been reached if the market continued to show double digit growth and on the assumption that their most immediate competitors had totally taken their eye off the ball.  With hindsight, many may now be wishing that they had made a more cautious statement of seeking to increase market share, whatever the size of the market.  It is against this prognosis that many are now seeking to position their product and criteria offerings.

In a static or volume declining market, there are essentially three principal options to gain market share:

1. Relax credit policy – this does not automatically necessitate dumping basic credit principles in the dustbin, but does allow lenders to straighten out criteria and make their range of products more accessible and better understood by the market.  Technology can ride to the rescue by allowing brokers and intermediaries to pre-qualify cases by on line DIP procedures, leaving valuation to be the only subjective matter when a client proceeds to formal application.  Mortgage Express has always been a front runner in this respect, and BM Solutions has taken it to the logical conclusion (at least from their perspective) of making the whole mortgage process on line, even if it takes the intermediary a considerable time to complete all of the information fields.  The majority of lenders have either already adopted a DIP to on-line offering or are in the process of catching up very rapidly.  Within these mechanisms, some lenders additionally deploy credit scoring techniques, and the debate over one lender’s perceived lack of credit policy against another will only be resolved by the evidence of default and arrears provisions in the coming months.

Softening yields and rising interest rates over the past 18 months have resulted in many borrowers having to inject more capital into property acquisitions than they originally intended.  Lenders have recognised that an 85% loan to value offering, with a heavy-handed interest rate cover requirement, is counter-productive.  They have either reduced the percentage excess cover, traditionally at 30% but now more than likely to be in the range 20% to 25%, or the interest rate to which it was linked (be it an initial rate or a reversion rate after the incentive period).  Linking to an initial highly competitive interest rate for this calculation (for example Mortgage Trust’s 2 year fix at 4.79%) does allow borrowers to achieve their expectations of borrowing in the range 80% to 85% rather than a figure in the mid 70%s.  However, artificial offerings at 89% or 90%, linked to a standard interest rent cover calculation, inevitaby suppress the borrowings by 10% to 15% and are counter-productive to borrower and lender aspirations alike.

 
2. Improve pricing matrix – reactions of some lenders to competitive re-pricing have often been described as showing all the intelligence of lemmings running towards the edge of a cliff, and there has already been ample evidence of such short-term strategies in 2005.  In the short term, clients are the beneficiaries, and such stances can only be maintained providing the underlying mortgages perform to optimal model expectations.  The fine-tuning of BTL securitisation, pricing and loss mechanisms over the last two years, spearheaded by lenders such as Paragon, has also delivered cheaper funding arrangements to the lenders themselves. Some of these gains can now be passed on in product offerings to borrowers without denting the profitability of the lender. With several hundred BTL products currently available, making your range of products stand out from the crowd is a challenge for any lender, and an early winner in 2005 has been the fixed rate offering of 4.99% from The Mortgage Works (albeit with a 1.5% arrangement fee), which has attracted significant volumes of business across their whole range of offerings, as well as on this particular product.

3. Enhance niche positioning – there are several BTL lenders who have never “taken on” the main market but have differentiated their positioning by playing to either property or borrower niches.  A successful lender to the increasing number of limited company borrowers is Capital Home Loans, who have recently announced streamlined procedures for borrowers up to £2 million (from an original threshold of £750,000) after a full review of the performance of their BTL book.  Some lender offerings to limited companies are risible, and this is an area where an increasingly commercially sophisticated approach by one or two lenders would reap large rewards.  Adopting a niche approach to property has long been the preserve of Paragon, with a large in-house valuation team, which has also allowed them to develop light refurbishment and full redevelopment products for established landlords.  Having ceased residential lending back in 2001 and focused their entire management team on the BTL sector, they have not only achieved remarkable lending volumes under the Paragon brand, but have also developed a separate brand identity and pricing mechanism for Mortgage Trust, which they acquired from Britannic Assurance in 2003.

It is perhaps no surprise that there are still new entrants joining the BTL market, thereby placing further competitive pressures on the whole sector.  Inevitably this must result in some casualties in 2005, but the real winners will be those with strong distribution channels and routes to market, since origination is the fundamental key to success as brokers seek the optimum package for their clients’ borrowing requirements.