Competitive rates and ambitious landlords are driving a growing focus on remortgaging among buy-to-let lenders, according to experts.
Figures issued by broker Mortgages for Business show that 66 per cent of buy-to-let loans were for remortgages in the first quarter of 2015, up from 62 per cent at the end of 2014.
Remortgages have now represented as least 60 per cent of the market since the start of last year.
And the latest figures show that for more complex property types, including houses in multiple occupation loans and multi-unit freehold blocks, the trend is even more pronounced. At the beginning of 2015, remortgages represented 73 per cent and 89 per cent of each market respectively.
Mortgages for Business managing director David Whittaker says that landlords are seeking to lock into improved rates and to build equity for later deals.
“None of them have cash to sit there and do nothing with, because that’s costing them money,” he says. “Cash is king, though, so they’re making sure they’ve got the money before they go out shopping.
“Some landlords are preparing to access their money now and will wait to see which way the wind blows on 7 May in the election.”
The Model Works founder Brian Hall agrees that many private sector landlords are feeling confident and seeking to expand, but adds that remortgaging is most popular among the asset-rich and cash-poor, who need the equity release to fund growth.
“This strategy increases gearing, which can improve profitability overall, and may explain the high proportion of remortgage to purchase loans,” Hall says.
“The down side is that it also increases risks, if property price inflation slows or even reverses. Our analysis highlights that rising property prices remains the primary factor driving buy-to-let returns.”
Figures from Moneyfacts show average rates for buy-to-let deals sliding over the last two years, with two-year fixed rates dropping from an average of 4.4 per cent to 3.5 per cent, while five-year rates have dipped from 4.6 per cent to 4.3 per cent.
The dropping rates represent a return to competition in a market abandoned by lenders in the immediate aftermath of the financial crisis, with observers pointing to “opportunities for large margins” right the way up to the start of last year.
The Business Mortgage Company managing director Andy Young says that his own firm records remortgages as roughly half of all buy-to-let loans.
“Over the last six or seven months where some lenders have been struggling to hit their targets on residential mortgages, they’ve now started looking at buy-to-let to grow their books and get wider margins, even with the rates lower than I’ve ever known them,” he says.
“The cost of funds is remaining low and so is the base rate, but there’s also an increasing level of competition forcing lenders to drop their rates even further if they want to increase, or even maintain, their market shares. So if you are a landlord now is a good time to be looking at your portfolio.
“Some will remortgage to get a better deal, there’s no question about that, but the majority will be looking to raise capital to fund new purchases.”
Similar dynamics are in place in the residential space, with lenders competing to attract borrowers and average rates for residential loans tumbling.
Moneyfacts figures show two-year fixed rates fell from an average of 3.8 per cent to 3.1 per cent over the past two years, while five-year rates have fallen from 4 per cent to 3.6 per cent.
However, TBMC’s Young suggests a marked increase in remortgaging in the residential markey is unlikely to follow.
“If you’re a homeowner it’s your main residence and you have the mortgage in order to fund the purchase of your house, but if you are a landlord, you may be looking to expand your business,” he says.
“So the dynamics which drive the market are totally different for owner-occupiers in the residential market.”
Not least among these is the ongoing impact of the Mortgage Market Review, implemented just over a year ago.
“You’ve got a massive amount of people who won’t qualify for the same loan on remortgaging that they already hold,” Whittaker says.
“Lenders say they don’t see the evidence of it, but the broker might get the customer in front of him and find that even if it’s a well-paid professional, they might not qualify for a remortgage even with their existing lender.”
Meanwhile, competition in the buy-to-let sector shows no signs of slowing, and although Young says that rates are unlikely to dip far below current levels, there are still opportunities for lenders keen to expand their market share.
“There’s still only one lender in the market offering at 85 per cent LTV, Kent Reliance, and they’ve been doing that for two years,” he says.
“Although there’s been a movement to 80 per cent LTV where there’s about 10 or 12 firms, still no-one else has gone to 85 per cent, and I think we will see some movement on that this year.”
Whittaker agrees: “It is not in the interests of the market for us to chase rates too low. Whilst I welcome competition, we are probably in a well balanced environment and it’s not helpful for the market for more people to come in and drive rates lower.
“We are in a market where there’s plenty of choice for landlords, things are very competitively priced and if they can’t run their businesses on the cost of funds that they can get today then frankly they should sell up and go and do something else.”