Buy to Let Product Numbers Buy to Let Product Pricing

Real Cost of Buy to Let Q4 2015 1

Buy to Let Mortgage Costs Index

Q4 2015

Buy to Let Product Numbers

In Q4 2015 although no new lenders entered the market, the average product count rose by

around 100 to a total of 1,068, driven in part by an increasing number of products for

limited companies.

Buy to Let Product Pricing

Limited Company Mortgages

Since the “bombshell” on interest tax relief for individual borrowers in July, the number of

mainstream BTL lenders offering BTL mortgages to limited companies has risen from seven

to eleven – thus reinforcing the competition in what is going to become a key sector of the

market.

A simple comparison of all buy to let mortgages currently on the market reveals the

following average “headline” rates:

Average Buy to Let Mortgage Rates

Trackers

Fixed Rates

2 years

3 years

5 years

Individuals

4.31%

3.19%

3.84%

4.01%

SPV Ltd Co’s

4.63%

4.56%

4.47%

4.85%

This apparently dramatic increased cost for limited companies has arisen because some of

the “vanilla” buy to let lenders have some extremely cheap mortgages available for

individual borrowers who meet tight criteria. Since there is some extra expertise and work

involved in lending to limited companies, these lenders are not (currently) geared up to lend

to companies – and thus there are few “bargain basement” buy to let mortgages for limited

companies. Generally speaking lenders that offer mortgages to SPV limited companies are

charging only a modest premium of up to 0.25% for these borrowers compared with

products available for individuals.

With the impending Stamp Duty surcharge on buy to let properties effective from 1 April

2016, anybody intending to incorporate their BTL business in order to protect their interest

cost tax relief needs to act now in order to get the transaction completed before April. The

reality is that a modest amount of additional interest now (and many other associated costs)

is likely to be a sound investment when compared with the additional tax that could be

payable further down the road if action is delayed. As always I would caveat this by saying

that every landlord’s circumstances are different and they should take professional tax

advice to determine the best course of action going forwards.

Interest Rate Overview - The path of uber-gradualism

Imagine a drunkard walking randomly in an idealised city. The city is effectively infinite and

arranged in a square grid, and at every intersection, the drunkard chooses one of the four

possible routes (including the one he came from) with equal probability.

Will the drunkard ever get back to his home from the bar?

Real Cost of Buy to Let Q4 2015 2

It turns out that he almost surely will – and similarly it is almost certain that interest rates

will at some point revert to “normality” – but there will doubtless be much staggering

around in all directions on the way there. Q4 saw a modest reversal of the downward trends

in Q3 - but already in Q1 2016 we have seen a lurch back downwards in all swap rates.

I have to admit that I have copied the term “The path of uber-gradualism” – but this does

describe very nicely the likely changes in Bank Rate over the coming years. Whilst the US

authorities imposed an increase in rates late last year, there is a feeling that they may

already be regretting this move and that, whilst they won’t reverse it, the rate of any future

increases is likely to be extremely slow. Combined with decelerating growth in the UK

economy this is likely to mean that we can forget any rises in Bank Rate for the time being.

Another factor that is relevant to the future costs of buy to let borrowing is the stance of the

Financial Policy Committee of the Bank of England. To help understand the background to

this I have extracted the relevant section from the minutes of 25th and 30th November

2015.

UK property markets

18. Activity and credit growth in the housing market had been gradually picking up

over recent months. Mortgage approvals for house purchase had been 69,000 in

September 2015, higher than the 62,000 level six months earlier, but well below the

1994-2007 monthly average of 99,000. Mortgage lending growth had been 2.2% in

the twelve months to September 2015. House price inflation had risen to 7.8% on a

three month on three month annualised basis in October and forward-looking

indicators suggested growth would remain strong in the period ahead.

19. The limited growth in mortgage lending had continued to be driven by the buy-to-

let sector. In the year to 2015 Q3, the stock of buy-to-let lending had risen by 10%,

compared to 0.4% for owner-occupiers.

20. Some of the strength in buy-to-let lending was consistent with an increase in

demand for accommodation in the private rental sector. Since 2008 this had

appeared to be driven largely by the reduced availability of high loan to value (LTV)

mortgage lending to owner-occupiers, which had increased the age at which many

potential first-time buyers were leaving the private rental sector. Population

dynamics were also likely to have played a role. These increases in rental demand,

Real Cost of Buy to Let Q4 2015 3

alongside low interest rates and low returns on alternative assets in the post-crisis

period, had boosted the attractiveness of borrowing for buy-to-let investment.

21. Increased competition among lenders in the buy-to-let sector had not to date led

to a widespread deterioration in underwriting standards of UK banks. But some

smaller lenders had loosened their lending policies, for example by raising their

maximum LTV thresholds. The Committee noted that new loans to buy-to-let

investors were often subject to less stringent affordability tests than loans to owner-

occupiers.

22. Assessed against relevant affordability metrics, buy-to-let borrowers appeared

more vulnerable to an unexpected rise in interest rates or a fall in income. The

Committee considered there to be a risk that during an upswing in house prices,

investors seeking capital gains would be able to increase leverage through the

purchase of multiple properties. The resulting boost in demand could add further

pressure to house prices, prompting both buy-to-let and owner-occupier borrowers to

take on larger loans, thereby increasing indebtedness. Since 2010, rates of credit

loss on buy-to-let loans in the United Kingdom had been around twice those incurred

on lending to owner-occupiers.

23. The FPC was alert to financial stability risks arising from rapid growth in buy-to-

let mortgage lending and supported the programme of work initiated by the

Prudential Regulation Authority (PRA) to review lenders’ underwriting standards. The

Committee also agreed that it would need to monitor developments in buy-to-let

activity closely following the tax changes to the buy-to-let market announced by the

Chancellor in the Budget and Autumn Statement.

24. HM Treasury would consult on powers of Direction for the FPC on buy-to-let

mortgage lending before the end of the year. Ahead of these powers being finalised,

the FPC stood ready to take action if necessary to protect and enhance financial

stability, using its powers of Recommendation.

I have highlighted para. 22 above since this demonstrates only too clearly that the Bank of

England is inclined to get involved in this market – and crucially it appears to be either

singularly ill-informed or else it is choosing wilfully to exaggerate the rates of credit loss on

buy to let mortgages.

Write-offs on buy to let mortgages since 2009 have averaged less than 0.2% p.a. and are

currently 0.1% p.a. having peaked in 2011/12 at around 0.3% p.a. Any rational person

would realise that when lenders typically operate on a Net Interest Margin (for BTL lending)

of at least 2% p.a. this represents a loss that should be readily affordable. The reality is that

only in two quarters in 2009 were arrears higher on buy to let than on residential mortgages

– and thus by that measure buy to let is less risky than normal residential lending.

The danger is that the Bank of England may seek to impose constraints on buy to let lending

which could simultaneously reduce the supply of mortgages and push up the cost of them. I

am sure that the lenders will be lobbying hard to correct the misunderstandings in the Bank

and it is to be hoped that the Bank will see the wisdom of waiting for the effects of the

various tax changes to wash through the system before acting precipitously.

Conclusion

The Governor of the Bank of England has effectively given up on “forward guidance”

regarding interest rates – but we do know that he is hell bent on trying to rein-in the buy to

let market. Whilst the industry will doubtless resist the more extreme elements of his

proposals, it is at least possible that at some point in the future there will be more

restrictions on buy to let mortgages and/or they could become more expensive as additional

(and objectively unwarranted) capital requirements are imposed on buy to let lenders.

Real Cost of Buy to Let Q4 2015 4

Once again I re-iterate that time is now very short if you want to avoid the Stamp Duty

surcharge that is coming in on 1st April.

Buy to Let Mortgage Products by Initial Term

Buy to Let Mortgage Products

Product

2014

2015

1 year

2 year

57%

54%

52%

49%

46%

43%

3 year

19%

17%

19%

18%

22%

20%

5 year

15%

19%

18%

22%

24%

23%

24%

Loan term

10%

11%

12%

The absolute numbers of products available in each category are still rising – with all

product ranges increases in number similarly.

Buy to Let Mortgage Charges

The overall trend of the last three years has been maintained as charges have continued to

have a declining impact on total costs. There is now even a trend downwards to be seen in

the High LTV category where costs had risen during 2014.

Effect of Charges on Buy to Let Mortgages

Quarter

Low LTV

Medium LTV

High LTV

Average

2013 Q1

0.62%

0.70%

0.71%

0.67%

2013 Q2

0.59%

0.64%

0.77%

0.64%

2013 Q3

0.58%

0.65%

0.73%

0.64%

2013 Q4

0.56%

0.61%

0.75%

0.61%

2014 Q1

0.54%

0.59%

0.75%

0.60%

2014 Q2

0.50%

0.59%

0.76%

0.58%

2014 Q3

0.41%

0.56%

0.84%

0.54%

2014 Q4

0.39%

0.53%

0.90%

0.52%

2015 Q1

0.39%

0.53%

0.84%

0.51%

2015 Q2

0.39%

0.54%

0.77%

0.52%

2015 Q3

0.38%

0.50%

0.67%

0.48%

2015 Q4

0.40%

0.50%

0.62%

0.48%

There has been a significant shift in the proportion of products with percentage-based fees

which has climbed steadily in the quarter. Indeed, currently (27

January 2016) there are

more percentage-based fee products than there are flat fees.

This shift could be due to lenders looking for ways to claw back some of their margins

which have been lost over time to competition. In general terms percentage based fees are

likely to be worth more than flat fees which are not affected by the ongoing rise in property

prices. Also, as the number of products for SPVs grows, our data tells us that the majority of

these products have percentage-based fees.

The fees charged on flat fee products have remained static at around £1,500 – the same

level has it has been since late 2010.

Real Cost of Buy to Let Q4 2015 5

Buy to Let Mortgage Charges

Fee type

2014

2015

Flat

50%

54%

53%

51%

47%

46%

42%

None

11%

12%

15%

13%

17%

18%

%-based

39%

34%

32%

34%

40%

37%

40%

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Commentary by Simon Whittaker, Finance Director, Mortgages for Business

For more information please contact:

Simon Whittaker, Finance Director

Tel: 01732 471622

Email: simonw@mortgagesforbusiness.co.uk

Jenny Barrett, Head of Marketing

Tel: 01732 471615

Email: jennyb@mortgagesforbusiness.co.uk