Vital signs

26 November 2009

The buy-to-let mortgage market has endured a torrid time in the last two years and with lenders running scared of anything remotely risky or non-conforming, the drop in mortgage lending in this sector has been striking.

At its peak in 2007, the BTL market was worth £44bn in gross lending and there were more than 3,600 BTL mortgages on offer.

Since then, the market has contracted substantially. By September 2009, there were just 179 such deals available and, at its lowest point this year, gross lending had fallen to £1.9bn for the second quarter.

But there are signs of life. The number of loans available has been creeping up slightly and the third quarter of 2009 saw the first increase in lending in 18 months.

Another sign that life is returning to the market is the emergence of a new lender. Last month, bridging finance specialist Tiuta bucked the trend of the falling number of lenders and launched into the sector.

Head of business development Guy Garrard says the decision was prompted by a number of factors. First, the company thinks the housing market bottomed out around May or June this year. Then, while many mortgage lenders are either hoarding capital or trying to find sources of funding, Garrard says Tuita is in the fortunate position of being very well funded. With the bridging loan market only able to use a finite level of funding, the business has been actively looking for areas to expand into.

He says: “We are in a healthy position in terms of funding and while we would like to think we can use all our funding for bridging purposes, that is not possible so we started looking at what else we could do. We launched into secured loans in June, which is a relatively close affiliation to what we do already. We launched a mortgage facility for houses in multiple occupancy in September.”

Garrard believes the lack of competition in the market not only leaves unsatisfied demand but also means the business can be priced attractively from a lender’s point of view.

“There is very little funding out there for buy to let, so it is something we can do now with an acceptable margin, which reflects the risk in the business. One thing many lenders could be accused of three years ago was the fact we had all lost the plot with regards to pricing for risk and although it was not the most pleasant journey, we are back there now.”

Finally, Garrard says the lender has no legacy issues to contend with.
“None of those factors in themselves is more important than the others but put them together and now is not a bad time to get involved in the market.”

However, Tiuta is not positioning itself as the saviour of BTL. Garrard says the firm is not rushing headlong into the market but will be proceeding cautiously. “For us, it is a toe in the water. We have done it with very restricted distribution, who we have been working with quite closely for over a year. We are not intending to write thousands and thousands of loans in a short period of time but will feel our way very carefully.”

It is offering a hree-year fixed deal priced at 6.99 per cent, slightly higher than the average two-year fixed rate of 5.71 per cent available from one of the other lenders still in the market.

With an upper lending limit of £2.5m and no limit on the number of properties owned by the landlord, the Tiuta deal is not designed with the casual landlord in mind.

“Ours is aimed at the more professional landlord with a track record and, critically, a clean credit profile,” explains Garrard.

The product has more stringent criteria than were commonly available just two years ago. Borrowers are limited to the lower of 70 per cent of the open market value of the purchased property or 85 per cent of the purchase price. This last feature should allow professional landlords the opportunity to continue to expand their portfolio by buying properties at bargain prices where they can find them.

“As a bridger, all we ever do is lend against open market valuation but we encourage people to buy a deal and if they can secure a genuine discount then we do not penalise them. We support their purchase. Our safeguard is the fact that the loan cannot exceed 85 per cent of the purchase price.”

To cement its place in the professional end of the BTL market, Tiuta is also about to launch a facility to lend to landlords trading as limited companies.

Despite its launch into the BTL market, Garrard says Tiuta is not looking at getting into the business of 25-year lending. “It is not intended to be a panacea. It is a three-year product. We expect in three years time there will be a wide variety of options available to these people to refinance. The buy-to-let market will undoubtedly look very different then.”

Garrard predicts the market will start to see more new entrants as soon as the first quarter of 2010 but says lenders will be more aware of the need to price the risks correctly.

“Provided lenders are able to price sensibly for risk, there is no reason why there shouldn’t be a healthy buy-to-let market, in terms of the number of lenders, within a relatively short time.”

While Tiuta is focused on shorter- duration lending, Garrard says the long-term future for BTL is promising.

“Five years ago, one in five potential borrowers were considered non-conforming. Given what has happened in the market since then, that has to be two in five now. That means 40 per cent of the adult population cannot get a mortgage. If people cannot get a mortgage, then they are going to rent. If they rent, then there has got to be rental properties and if there are going to be rental properties there has got to be a strong buy-to-let market.”

With so many people unable to buy property, Garrard says we will see a fundamental shift in the way that people view property, with many people reverting to long-term renting rather than buying.

“If you lend on the right type of property and you price for the right risk, then buy-to-let remains a very sensible market,” he says.

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