11 minute read
Buy-to-let Review
Don’t discount the statistics
Bob Young
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chief executive officer, Fleet Mortgages
There is clearly a great appetite for statistics and data analysis within, and around, the UK housing and mortgage market, simply because of its importance to the UK economy and plc as a whole.
That importance has, however, often led to such a glut of data, with so many different methodologies, that it has been difficult to sort the wheat from the chaff when it comes to the true picture of what is happening in the market.
There is such a high number of research pieces released during any given month – in normal times, at least – which provide different and often contradictory results, that it is difficult to work out what is actually the truth.
BIG DATA
Given the current situation around COVID-19 and what it means for the housing market, you might think that data is more important than ever.
However, recent statistical analysis has tended come from a preCOVID-19 market, making it appear like some sort of anomaly given today’s vastly different environment.
That’s not to say that we should discount this data. After all, if we’re talking about the strength of transaction levels or house price growth back in February, this can’t be viewed as ‘false data’, it just perhaps reveals how quickly things can change.
But it also might point to where the future could lie once lockdown is relaxed and we can begin to move the market forward, particularly when it comes to the re-introduction of physical valuations, which should provide a significant boost.
January and February 2020 might already seem like a long time ago, but I’m positive that the market can get back to a similar position in a relatively quick space of time; it just depends at what point in the future that journey can begin.
Some commentators have called for indices and datasets to be suspended during the current crisis. I can see the merits in this, but the demand to know exactly how COVID-19 has impacted the housing and mortgage markets will be incredibly high.
Who could be expected to miss out on that PR opportunity?
LIMITATIONS
The argument for pausing indices and datasets during the crisis is that, for one, the low level of activity renders analysis statistically unviable.
We can’t compare apples with apples, because there’s not enough apples available at the moment to make such a comparison.
There are also those who say that the publication of such data may only result in an already spooked marketplace becoming even more worried, and that this ultimately leads to an ever-decreasing circle approach. In other words, that we would be somehow complicit in making an already bad situation worse.
M I
There are some, I’m sure, who feel very strongly about this. My own understanding, at least according to UK Finance’s calendar of upcoming data releases, is that its Mortgages Trends data and Household Finance Review have not been scheduled for release over the coming months.
This may well be a decision based on the above factors, perhaps most obviously around how confident, or otherwise, the trade body can be in the data it’s getting.
Indeed, the entire lending community spent a good deal of time during March and April focused on one thing alone: helping borrowers secure mortgage payment holidays. Can we really say this was a normal period of day-to-day lending? Would the figures for activity during that period lend themselves to any positivity about what might be happening now? I doubt it.
I can therefore understand the arguments on both sides; this is such a unique situation – or so we hope – that it perhaps doesn’t bear comparison with the previous quarter, or this time last year, for example.
And yet, the reality of the situation is that the data we’ll see covering this time will be ‘real’, because this is the market right now, even if it looks completely different to anything we’ve seen for over a decade.
What we might have to do is look at this period in isolation, or in the context of a post-lockdown environment. I’m not one for making predictions, however I think we must all expect the drop to be severe but the bounce to be quick and significant.
There is of course plenty that can happen between now and then, but it would be very surprising not to see a positive and sharp turn-around in fortunes when the green light is given.
We’re certainly planning for this, and I’m sure advisers are doing similarly.
The data will be what the data will be; the most important point is to survive this period and be ready to hit the ground running as soon as we are allowed to.
Working through the new abnormal
Jeff Knight
director of marketing, Foundation Home Loans
Here at Foundation Home Loans, we recently teamed up with Mortgage Introducer on a webinar focused on working through the new abnormal.
The aim was to tackle questions around how lenders, brokers and borrowers are coping. Hundreds of brokers tuned in, which demonstrated their thirst for information and how important it is for lenders to engage and be honest and transparent in these challenging times.
For the purpose of this article, I thought I would highlight some of the questions posed by our audience, and major talking points which emerged during the discussion.
Why have some lenders had to withdraw from new lending?
Reasons will differ between lenders, but from our perspective the decision was driven by three key factors: 1) Lack of internal surveys during lockdown. Our current criteria and funding requirements mean we require internal surveys, so had to quickly review our short-term lending position. 2) The introduction of mortgage payment holidays. There was limited consultation ahead of this, especially with non-bank lenders. We got around six hours’ notice. That quickly raised serious concerns when it came to operational pressure in terms of dealing with cashflow and the volume of enquiries. That’s not to say the initiative shouldn’t be applauded, but from a lending perspective it was a tough initial logistical challenge. 3) Pricing uncertainty. We are a wholesale funded lender, meaning our pricing reflects what we can achieve in the securitisation market; current conditions have created an uncertain pricing environment. This is setting down a little and we, like all lenders, are carefully and constantly reviewing market conditions, internal processes and funding requirements, and will react accordingly.
What is the main challenge facing wholesale funded lenders and how does it apply to intermediary firms?
The primary focus for any lender, and any business, is around cash and cash preservation. We all need to be careful around cashflow and maintain a real understanding of how much cash we have as a business, how much is due to come in and go out, and how outgoings can be moderated.
We don’t know how long this crisis will last, so the better your understanding of the financial impact on your business, the more it will be sustainable in the short, medium and long-term.
Will more clients fall into the specialist sector due to the crisis?
We fully expect more borrowers to fall into a grey area where many mainstream lenders will be unable to meet their needs as they fall beyond the remit of their existing policy, criteria, and underwriting capacity.
The importance of manual underwriting will come to the fore here, especially considering how many personal and income scenarios will have changed. Opportunities will certainly emerge for specialist lending advisers moving forward.
How will this impact on the buy-to-let market?
Critically, the answer depends on how many specialist lenders make it through this crisis. In the old ‘normal’ we consistently saw a quarter-on-quarter increase in the number of available products in the owner occupier and buy-to-let (BTL) markets.
We also saw a consistent, if gradual, reduction in margins. More choice and keener pricing was mainly driven by specialist lenders; if a significant number of these cannot trade or resume lending then competition will be hit, especially across the more specialist areas of BTL.
In terms of individual lending to BTL landlords, there will be an increased emphasis on cash flow resilience. Voids, and looking at how to cover them, has always been a significant topic; what this event is teaching not only lenders, but also landlords and advisers, is the importance of planning ahead for more severe scenarios.
Focusing on more macro-economic factors, many people will experience constraints around their post-crisis earning capabilities, and will not be able to immediately bounce back to their previous income level, especially those not on PAYE-style employment.
This may hamper some from accessing the mortgage market and result in an even greater reliance on the private rented sector. Once we get through this – which we will – we may see some conservative growth in the BTL market.
M I What can brokers be doing to better safeguard the needs of their clients in the future?
Protection will become more important. Many advisers are already having, or trying to have, these conversations with their clients, but this type of advice will rise even further as the population now fully understands just how vulnerable their incomes are to events beyond their control.
The reality is that incomes are never as certain as we believe them to be, especially for the growing selfemployed community.
Responsible lenders have a duty of care to take this into account, while advisers need to ensure their clients have access to the right types of products; this combination will result in a greater emphasis on protection moving forward to protect a range of financial liabilities.
Riding out the turbulence
Jane Simpson
managing director, TBMC
The buy-to-let (BTL) mortgage market has, unsurprisingly, experienced significant turbulence since the beginning of the coronavirus lockdown, meaning the profile of lenders and products available to landlords has changed.
To begin with, some lenders have withdrawn from the market. A number of these, typically non-banks, should be temporary as they wait for funding lines to become available, but there may also be long-term casualties, unable to return to BTL lending post-crisis.
REDUCED PRODUCTS
The overall number of buy-to-let mortgage products has dropped markedly. Moneyfacts reported that 1,304 products had been taken off during March, with changes continuing throughout April.
It was reported that 5-year fixed rates took the biggest hit, followed by 2-year fixed rates.
Some lenders have also responded by reducing their maximum loan-to-values (LTVs), resulting in a significant dent in the 80% LTV market, and the removal of 85% options.
This may cause challenges for buy-to-let clients with more highly leveraged properties when they are looking to remortgage, and in turn deter those without high deposits from making purchases.
We have also seen lenders modifying their lending criteria, especially in the complex buy-to-let sector, which may allow the remaining specialist lenders offering, for example, finance for houses of multiple occupancy (HMOs), limited companies and multi-unit blocks, to take a large slice of the pie.
Interest rates have increased on several ranges, which will be disappointing to landlords, especially as the mortgage interest tax relief scheme for buy-to-let properties was finally phased out in April, creating additional costs for many rental property businesses. However, there are still competitive rates to be found.
DESKTOP VALUATIONS
The countrywide lockdown means visual property inspections are no longer possible. For this reason, some lenders have suspended offering new purchase finance.
However, there are a growing number of providers which have switched to using desktop valuations or automated valuation models (AVMs) during this unprecedented time, to allow business to continue.
The government has advised against house moves during the crisis, which has inevitably slowed the housing market and impacted on buy-to-let purchase transactions.
However, it does mean that there is likely to be a pent-up demand for buyto-let finance once lockdown measures are lifted and movement in the market is resumed.
This is obviously a challenging time for intermediaries in the buy-to-let sector, but also a time when landlord clients can benefit from our support.
Being able to answer questions about the availability of finance or other relevant issues, such as buy-to-let mortgage holidays (available for both personal name and limited company mortgages), will be appreciated.
Many landlords could save themselves money by remortgaging, so it is also worth offering to review your landlord client’s whole portfolio during this period.
There may be options available to them to release some equity, which could help to ease the pressure on their buy-to-let businesses in the current circumstances.
M I REMORTGAGE BUSINESS
At TBMC, we are paying particular attention to remortgage business, as many of our clients have mortgages coming to the end of their initial rates during the next couple of months. There are still plenty of options to choose from and solutions to be found for most scenarios, which is where having buy-to-let expertise comes to the fore.
