The sector has survived the first tranche of changes better than expected. Opportunities still exist, if approached with a new mindset David Whittaker explains...
It is good to see that residential mortgage lending is on the up. Second quarter figures released by UK Finance, (the body which has replaced the Council of Mortgage Lenders), show a 24% year-on-year increase, and a 31% increase on Q2 2015 – the period immediately before the government (oh Georgie boy we miss you – not) began announcing a raft of fiscal and regulatory measures designed to level the playing field between home owners/buyers and buy to let investors.
Perhaps more importantly, the figures also reveal that buy to let now (Q2) accounts for around 13.8% of all lending. This is a substantial reduction from two years ago, when the figure reached 18% and it shows that the measures are working.
Despite rather sensationalist reporting in the Telegraph claiming:
“The rapidly shrinking buy to let market is driving lenders to a mortgage price war as they compete for dwindling demand from borrowers.”
I don’t think this means that the popularity of buy to let is still massively on the decline, or there is a rate war going on, rather, lending dropped off and has now levelled out – for now.
Since the introduction of the higher rate of stamp duty, we’ve seen BTL lending plateau at an average of £2.8bn per month compared to £3.2bn per month in the 14-months before the new SDLT rate was introduced.
Of course, the lower lending average is not all down the stamp duty change but that was certainly a pivotal moment. In my opinion the changes to income tax relief for landlords and the new PRA guidelines will have far greater ramifications. They are changing the dynamic of the buy to let market.
We are seeing fewer would-be landlords enquiring about buying property. We know of landlords who are downsizing their portfolios or selling up altogether. But the majority of our active clients have taken professional advice and adjusted their strategies accordingly.
The so called “rate war” too is a bit misleading. Sure, rates have reduced. Mortgage Brain reports that the cost of two-year fixed rates, both at 60% and 70% LTV, are now 4% lower than they were in May 2017.
However, data from our buy to let mortgage sourcing tool, Mortgage Flow, show that these rates are only 1.4% lower (i.e. a reduction of just 0.04% in pricing). Crucially, the difference may be in how the product information is captured.
Also, we are seeing lenders make up for lost margins in arrangement fees. We have seen an increase in the use of percentage-based fees and a drop in the use of flat and fee-free products which suggests that lenders could be attempting to regain some of their lost margins in other ways – a cost that still ends up in the borrower’s pocket.
I don’t think we’ll truly know what will happen to buy to let lending until the effect of the new rules on lending to portfolio landlords manifest themselves. But if we continue as we are until the end of the year, buy to let lending will total something in the region of £33bn. That’s a very long way from the paltry £8.6bn, where we were only eight years ago!
In the meantime, there are still opportunities out there for investors, lenders and brokers – they will just take an adjustment of mindset to attain.
An abridged version of this article was published in Mortgage Strategy on 21st September 2017.