Can buy-to-let lenders reinvigorate a sluggish market?

Press release: May 2005

Can buy-to-let lenders reinvigorate a sluggish market?

In a static or volume declining market what can buy-to-let lenders do to drive sales and increase their own market share?

The slowdown in the general housing market in the closing months of 2004 and sluggish activity in the early months of 2005 inevitably predetermines activity levels in the buy-to-let sector as their fortunes are inexorable linked.

The Council of Mortgage Lenders buy-to-let figures for the closing half of 2004 demonstrate this, showing new lending down by 18% compared against the first six months of 2004 and 16% lower than the same period in 2003.

So what can buy-to-let lenders do to reinvigorate the market?  David Whittaker, managing director of Mortgages for Business, one of the country’s leading buy-to-let mortgage brokerages, believes three options are open to them.

Option one: relax credit policy

“This does not mean dumping basic credit principles in the dustbin, but allowing lenders to straighten out criteria and make their range of products more accessible and easier to understand,” says Whittaker.

Softening yields and rising interest rates over the past 18 months have resulted in many investors having to inject more capital into property acquisitions than perhaps originally intended.  As such lenders are beginning to recognise that the 85% loan-to-value offering and heavy-handed rent-to-interest requirements are counter-productive.

“Many lenders are reducing the rent-to-interest calculation (whereby rental income has to exceed lending repayments) from 30% to 20%-25% and in some cases much lower,” says Whittaker. “Such a move will make it much easier for serious investors to capitalise and build upon their portfolio.”

Option two: Improving pricing matrix

“Fine-tuning of buy-to-let securitisation and pricing and loss mechanisms over the past two years, spearheaded by lenders such as Paragon, has delivered cheaper funding arrangements to the lenders themselves,” says Whittaker.  “And some of these gains are now being passed on to investors without denting the profitability of the lenders themselves.”

With several hundred buy-to-let products currently available, making your product stand out from the crowd is a challenge for any lender.  One 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.

“It is likely that this will become more apparent driving ever-more competitive products,” says Whittaker.

Option three: enhance niche positioning

“There are several buy-to-let lenders who have never ‘taken on’ the main market but have differentiated their position by playing either to property or borrower niches,” says Whittaker.

Adopting a niche property approach has long been the preserve of Paragon.  With a large in-house valuation team, Paragon has developed products exclusively directed towards light refurbishments and full redevelopments.

“Having pulled out of the residential lending market in 2001 to focus entirely in the buy-to-let sector, they have not only achieved remarkable lending volumes under the Paragon name,” says Whittaker, “but have also developed a separate identity and pricing mechanisms for Mortgage Trust, which they acquired in 2003.”

Whittaker concluded: “It is perhaps no surprise that there are still new entrants joining the buy-to-let market, thereby placing further competitive pressure on the whole sector.  Inevitably this must result is some casualties in 2005, but the real winners will be those lenders with strong distribution channels and routes to market and the savvy investor.”

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Mortgages for Business

Mortgages for Business are independent experts in buy-to-let and commercial mortgages managing single and multi-let property portfolios for thousands of UK investors.  Its brokers have access to a large portfolio of fixed and variable interest rate mortgages from a panel of over 30 lenders and offer truly independent advice that is appropriate to investors.

For further information contact:

Matt Baldwin, Coast Communications

Tel: 01233 721597 or 07930 439739

Email: matt@coastcommunications.co.uk

Jonathan Moore, Mortgages for Business

Tel: 01732 471619

Email: jonathanm@mortgagesforbusiness.co.uk