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Buy to let is becalmed

Lloyds Banking Group is expected to reveal a surge in net buy-to-let lending figures next week as the sector continues to suffer an unhealthy lack of competition.

The bank is one of the few providers of buy-to-let mortgages and, along with Nationwide’s The Mortgage Works, controls the lion’s share of the sector.

The dearth of competition has meant the market has shrunk considerably. The most recent figures from the Council of Mortgage Lenders show that buy-to-let lending accounted for 6 per cent of all UK gross mortgage lending in the first quarter of 2009, down from 12 per cent a year earlier.

It says there were 22,400 new buy-to-let mortgages advanced in the first quarter, down from 72,400 in the first quarter of 2008. According to eMoneyfacts, there are now 191 buy-to-let products on the market, down from 278 in January. It says this accounts for around 13 per cent of the total mortgage market.

Lloyds and Nationwide would not reveal how much of the market they think they control but The Mortgage Broker Limited sales director Darren Pescod estimates they account for up to 85 per cent of the sector.

Lloyds Banking Group head of intermediaries Peter Curran says buy to let will remain a key component of the bank’s intermediary proposition. He says: “Demand is still strong but it is clear that there has been a reduction in the number of active lenders in the market.”

Pescod says the lack of competition has led to a constant pricing up of buy-to-let products between the two lenders: He says: “One lender, once it decides it has reached its lending limit, reprices its range up to stop business and then the other rival reacts with a similar price increase. That is the state of the buy-to-let market right now.”

TMW managing director Larry Banda admits the firm is having to artificially cap its products to control capacity but does not look forward to a market without competition.

He says: “It would be very good if other lenders were to come back to the marketplace. I know a number of people in similar positions to me in other institutions, who were big players a few years ago, are talking about when they come back to buy to let, not if. But it is a false situation right now.”

A recent report by Exact Mortgages illustrates the buy-to-let drought. It found that 55 per cent of advisers think now is a good time to buy but more than half surveyed said that buy-to-let business accounts for less than 10 per cent of their mortgage revenue.

Mortgages For Business managing director David Whittaker says the problem is compounded for advisers because there are no specialised lenders operating in the market. He says: “Lloyds Banking Group through BM Solutions and Nationwide’s TMW are sticking with their vanilla pricing, offering one price for a product.”

Whittaker says this is a problem as there is no in-between pricing – risk-based pricing based on commercial sensibilities. He says this is excluding businesses and professional landlords who are used to working on a commercial basis.

He says: “With the banks now, what you see is what you get, it either fits or it doesn’t.”

Paragon Mortgages says the lack of options for professional landlords is particularly damaging, not just to the sector but also to UK housing market. Managing director John Heron says: “The Government estimates that 11 per cent of landlords own 73 per cent of rental properties. It is very important they can operate but the mortgages out there do not support that.”

Heron says this is bad news for millions of renters. He says: “If landlords are unable to buy more properties, we will see a congestion, which then leads to increasing rent.”

Smartlandlord.co.uk managing director Keshav Thukaram says: “The rental sector is a ticking timebomb in this country. Lenders are not meeting landlords’ demands of funding for new property, so where does the Government house these people who cannot find a home to rent? They are the most needy people in the UK. It needs to focus on the private rental sector or we will end up in a very difficult situation.”

There is some hope for advisers on the horizon. Aldermore Bank, funded by Ruffler Bank, has released a limited tranche of buy-to-let deals for limited companies and professional landlords, through a panel of advisers.

Whittaker, whose brokerage is on the panel, says Aldermore’s presence, however small, is a welcome one and may force TMW and BM to become a little more competitive. He says: “Aldermore takes us back to the days prior to vanilla buy-to-let lending, they look at it on a commercial basis. They have a better stress-test on rental interest cover than other commercial banks and they are covering some of the painful gaps in the market where the likes of Paragon used to fit.”

But Pescod thinks Aldermore’s proposition will not dent the dominance of the big two, “It is a drop in the ocean, Aldermore may help fill a gap, but it is a gap that neither TMW or BM operate in, so it will not solve the competition problem,” he says.

Banda says: “We need a vibrant buy-to-let market. The more competition that comes in, the earlier brokers will see higher LTVs come back. There will be opportunities in the coming months and years to increase LTVs but that will only come with more competition.”

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