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Buyer straits

Mortgage brokers bearing the brunt of inflexibility of buy-tolet lenders are concerned that the sector may be heading for a significant fall.

There have been many stories in past months about the BTL bubble bursting and brokers fear it may now be close. They are finding themselves increasingly squeezed by len-ders on BTL mortgages, rates and loan to value ratios , prom-pting questions on whether lenders are preparing themselves for a fall in the market.

Chelsea Mortgage Man-agement sales manager Sim-on Bucknell says most lenders are playing it safe on pricing when the economic climate points to lenders being truly innovative.

Tenant demand appears to be staying high as first-time buyers are still struggling to enter the market.

Paragon says around 10 per cent of houses in the UK are rented privately and this will have to rise to 15 per cent over the next 10 years to keep pace with demand.

But Bucknell says he and other brokers are struggling to get mortgages agreed due to lenders’ rental calculations and criteria that have suddenly become inflexible.

Bucknell says two of his recent cases indicate there may be a problem in the BTL market. One client, a consultant at a multi-national accountancy firm, wanted a loan at 50 per cent LTV and was ref-erred to The Mortgage Works’ “special case” desk. Her and her partner earn high salaries but she is going on maternity leave. The application was rejected.

The second case involved a solicitor earning 200,000 who was told he would have to contribute a further 30,000 to the loan because his rental figure was short by 80 a month.

Paragon director of mortgages John Heron says some lenders operate criteria that is driven fundamentally by the rent to mortgage ratio for an affordability measure and little or nothing else. To support this criteria, they use a credit-scoring technique. In these circumstances, criteria need to be more rigidly adhered to because there may be no other validated information on which to base a decision.

But Bucknell says: “Brokers are crying out for lenders to be innovative. All we ask for is common-sense lending. For residential mortgages, most lenders bend over backwards but not for BTL. Most lenders seem to have chosen to play it safe regarding pricing when really this is a fantastic time for a lender to be truly innovative.”

Bucknell says GMAC-RFC has good LTV criteria but it has created an anomaly as its interest rates are relatively high. GMAC will go as high as 89 per cent LTV on its three-year fixed-rate mortgage but Bucknell says the rate was too high although it has since been reduced to 5.85 per cent.

GMAC head of marketing services Jeff Knight says: “We have recently reduced the interest rate for the very reason that Simon has emphasised. We agreed with the anomaly and have responded to the market. We design products as we see fit and respond on intermediary feedback.We believe BTL will continue to be strong in 2005.”

Mortgage Trust ties a client in for two years after its two-year fixed rate at 4.79 per cent of Libor plus 1.75 per cent. The firm believes that in a market where capital appreciation is not expected to accelerate greatly in the near future and interest rates are predicted to rise, it is important for all lenders to take responsible approaches towards lending.

Marketing manager Nicola Severn says: “Although some BTL lenders have inc-reased their LTVs beyond the traditional 85 per cent and reduced their rental income requirements down, Mortgage Trust believes, both for ourselves and our borrowers, that we ensure our loans are fully serviceable.”

Mortgage Trust says it has a “sensible approach” to product innovation without compro-mising a responsible approach.

The lenders that Money Marketing has spoken to all fully support the BTL market and promise to be innovative but they also admit to be looking gingerly at the market.

Bristol & West PR account executive Carla Lavender says criteria in the market are being tweaked in accordance with current market conditions but this is responsible rather than restrictive.

Hill Martin mortgage specialist Steve Smith says there are a few players after the same business in a market that is witnessing a downturn.

He says: “Rental yields in the South and particularly in the South-east are down by 4.5 to 5 per cent. On top of that, from April 2006, we will have A-Day, when a property can be rolled into a Sipp. I think it can be argued that a lot of people are waiting until April 2006 before making big decisions on BTL.”

Mortgage Portfolio Services mortgage planner Simon Chalk is less perturbed. He says: “Innovation is less apparent but the regulated side of lenders’ operations has placed a huge strain on manpower and lim-ited development spend. I am sure things will start easing and we will see fresh moves in the months ahead.”

Heron admits there is a housing market slowdown which requires lenders to carefully assess property values and rental flows on an individual property. But he says criteria has not tightened in recent months although Paragon is taking a more tentative app-roach to the market.

He says: “It is simply that a more cautious outlook is appropriate. We continue to undertake a thorough assessment of an individual’s credit profile and their experience as a landlord. Where we find good reason, we are exercising flexibility.”

The BTL boom has worked its way into the culture of the UK and has attracted investors who operate as professionals or as small-time players looking to augment other savings and pension arrangements.

No one can blame lenders for being cautious in a slowing economy but intermediaries are crying out for them not to stifle innovation.

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