MORTGAGE SPECIAL
ThE OffsET MORTgAgE One area of mortgages which is not particularly well known, but which could be about to increase its share of the market, is offset. Chris Smith says, “For anyone with savings, it’s a completely tax efficient mortgage, instead of having interest paid on your savings, on which you have to pay tax, you save money against your mortgage interest payments, yet our research shows that only seven per cent of the public understand what offset is.” About 30 per cent of Yorkshire’s total business is offset, he says, against only seven per cent in the wider market, and he will be introducing offset to the Chelsea’s range of mortgages later this year. However, only a small number of lenders
have good ranges of offset mortgages, Hinckley & Rugby, First Direct, and Woolwich vie with the Yorkshire, while ‘family’ offsets (which allow parents, for instance, to set their savings interest against their children’s mortgages, while remaining in control of their capital) are offered by several societies; Yorkshire, Market Harborough and Newbury.
ThE Buy TO LET MORTgAgE Perhaps the poster boy of the boom years was buy-to-let, pretty much a new market and one which attracted competition both from specialist lenders such as Paragon, Kensington, and GMAC, and from building societies and banks. Having grown quickly throughout the boom, it was badly hit when the crunch came, both in terms of advances (down 73 per cent in number, 81 in value) and in terms of products available, which fell from 3648 at the peak in July 2007 to 330 last year according to a Paragon report. Loan criteria were also tightened.
According to Paragon, 65 per cent of products in August 2007 had an LTV of 80 per cent or more, by 2010, only four per cent did, with nearly half of them offering 65 per cent or less. But that has changed, Michelle Slade says. “The BTL market has seen higher LTVs, and increased competition has seen rates falling, helping people back into the market. Lenders are competing to be in the best buys at the moment, they actively want to lend.” Nationwide has been increasing its BTL
share through The Mortgage Works, which together with Lloyds’ BM Solutions now dominates this market. Their share has fallen as other players re-enter the market, they had 35 per cent each a year ago, but they are still dominant.
24 AUGUST 2011 PROPERTYdrum
BTL sTILL AN ATTRACTIvE MARKET Meanwhile, some of the lenders who had
exited this specialist market a few years ago have now come back; Kent Reliance came back to BTL in June, with an intermediary- only product that includes lending on Houses in Multiple Occupation as well as single-family properties; Skipton too is now offering BTL, and Leeds is cutting its BTL rates and fees to attract more business. Precise Mortgages, Aldermore, and
Tiuta also started lending to this market in 2010, and Bank of China has some good deals, says Michelle Slade. But she warns that the movement is cautious rather than gung-ho, “While a few smaller lenders are trying to make their mark, they’re not coming in with a big splash; they want to feel how things are before they commit more funds.” Ray Boulger points out that BTL is an
attractive market in terms of profitability and default rates. “It’s attractive to lenders
While an 85 per cent loan was the norm
pre-crisis, with an average advance of 80 per cent, John Heron says LTV of 75 per cent is standard, with an average loan of 70 per cent. Just a few 80 per cent loans are available. However, he points out that even if higher LTVs were granted, higher loans would probably still fail the affordability test (monthly rental covering 125 per cent of the mortgage outgoings), which is important in the yield-driven property market. “The market fundamentals don’t work at high LTVs, so the affordability criterion often rules out higher LTVs even when they are supposedly available.” BTL mortgages also remain significantly
more expensive than owner-occupier mortgages. Heron points out that this reflects the cost of capital; “Buy to let mortgages are seen as a commercial market and thus require higher levels of capital. Typically the premium is no more than one per cent over the life of the
Lenders only have small packages of funding, they are very wary of
being swamped.” BERNARD CLARKE CML
as it offers a return one and a half per cent higher than residential but with no higher risk of delinquency,” he says. “If you’ve got good underwriting, then it is no more risky than residential lending. The lenders who have problems are those with loose criteria.” But, he says, the BTL market, even more than the owner-occupier market, is being held back by the current low interest rates. Since BTL mortgages revert to tracker rates rather than SVR, landlords whose fixes have expired are currently benefiting from exceptionally low interest rates. Once interest rates start to move upwards, or once a move appears more likely in the short term, he believes BTL remortgages will start to take off. Despite the good news, though, criteria
for BTL lending remain tight. Catherine Hearnden says it’s the one area where LTVs aren’t loosening up significantly; “You just can’t get an 85 per cent buy to let mortgage any more, the way you could before the crunch.”
mortgage, the average spread over base is around 3.5 per cent, much wider than it used to be, but that reflects the true cost of money in a post crunch world.” There is a growing and flexible range of
buy to let products available; for instance The Mortgage Works offers first time landlord mortgages, light refurbishment mortgages, and HMO mortgages. However, their multi property portfolio product has now been closed to new customers (though existing customers can still add properties to their portfolios). Paragon doesn’t offer a portfolio product, John Heron says that he believes they don’t work particularly well for either landlords or lenders. Despite these reservations, Ray Boulger
sees BTL as a huge growth opportunity. He says “BTL lending will increase 15 to 20 per cent this year, performing strongly in a flat overall market.” Recent strength in rental levels and tenant demand underpins the good fundamentals.
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