T he CML has sounded a note of caution on buy to let, saying it has yet to be tested in a market downturn. Do you agree it should be treated cautiously?
Thompson: A cautious approach is sensible, although many property investors have other means to dip into should rates rise and, from talking to lenders, I understand that the risk profile of these borrowers tends to be very good. Two main risks are rates rising and tenancy gaps but many have taken fixed mortgage rates, mitigating some risk.
Those considering buying now should strongly consider fixing their mortgage rate even though they may be effectively paying a premium for security. In terms of tenancy gaps, this is clearly a potential risk, although in many parts of the country there is strong demand in the rental sector, so in theory if a tenant should leave there is likely to be another waiting, although the picture varies significantly by region.
Maskens: Yes, especially as the inexperienced investor tends to enter any market at the height and suffer the worst effects in a fall. These are still sound investments for many people and depending on the part of the country, the price and the yield but should be stress-tested against a worst-case scenario to clarify the investor's attitude to risk.
Batchelor: All large investment decisions should be treated with caution and taking out a buy-to-let mortgage is no different. Careful research should be done to investigate the area being in invested in, including current market data and forecasts on house prices. We believe the buy-to-let market will remain buoyant, although we are seeing an increasing number of remortgages and feel this is likely to continue.
The Treasury has just published a consultation paper asking for views from the industry on whether home reversion schemes should be regulated along with lifetime mortgages. Do you think it is important for home-reversion schemes to be regulated?
Thompson: Yes, although I can understand why this is currently not the case. I see that home-reversion schemes could potentially be riskier than lifetime mortgages for some and therefore would certainly like the procedures around the sale of these products to be equivalent to those proposed for lifetime mortgages.
I also worry that some may move towards the sale of home-reversion schemes to maximise the huge potential in a rapidly growing market and at the same time avoid FSA regulation. This would clearly be to the detriment of the consumer and would have a worrying impact on a part of the population that has already suffered financially in recent years. Those advising on lifetime mortgages will be regulated by the FSA and, as part of best practice, should allow their customers to consider home reversion schemes as well. On that basis, I would argue that customers should therefore in all circumstances only deal with an FSA regulated firm.
Maskens: Yes, the Treasury has rightly noted that the target market for home reversion tends to be the low-income elderly and, by definition, those without access to independent advice. The trade body Safe Home Income Plans estimates that in 2002 a quarter of the £852m market was accounted for by home reversion.
The FSA already has powers to make rules related to the unregulated activities of regulated firms and, for firms dealing in both markets, the FSA has made rules to cover both products. It would, therefore, not seem a large step to offer wider protection to these potentially vulnerable consumers. If the FSA failed to regulate the products fully, it may encourage unregulated trading from firms that were either unprepared to invest in the systems and controls or were unable to get authorisation because of skeletons in the cupboards.
Batchelor: Yes. Many of the firms – providers and brokers – which offer home-reversion schemes will undoubtedly be regulated by the FSA, either currently or in the future in some shape and form due to their other activities, but it is important that these products are brought into the FSA's scope as soon as possible.
It is no coincidence that the FSA has published more stringent rules for lifetime mortgages, as it rightly sees them as a higher-risk product and we view home-reversion schemes in the same light.
We welcome the Treasury's initiative on this subject and look forward to seeing the results of this paper in the New Year although it is regrettable that, as this will require new legislation, it cannot be pushed through by October.
Do you think abuse of self-certification mortgages is widespread in the mortgage industry, as was implied in a recent BBC programme?
Thompson: I do not think that it is widespread but I do think it is an area of the market that we need to watch closely. I know many instances where this has been a suitable recommendation for a borrower, helping them to buy a property where they may have struggled under normal criteria. But clearly, they are not without risk – advisers must take appropriate steps to ensure that self certification mortgages are suitable for their customers, and I am sure that the vast majority already do this.
Maskens: Yes. We believe this to be the case and, despite their representations, with the implicit knowledge and endorsements of the lenders. The massive inflation in house prices, leading to the inability of many to qualify for a normal multiples' mortgage, combined with a proliferation of the products has led to this situation. We all know that rental expenditure can often exceed the costs of a mortgage taken on a self-certification basis so perhaps we should be focusing on the ability to pay, which differs dramatically according to the circumstances and attitude of the applicant.
Batchelor: We do not believe so as the majority of lenders that accept employed persons on self-certification products, of which we are one, include reasonability checks which checks that the income stated is reasonable considering the occupation. Self-certification mortgages have a place in the market and in most instances serve the consumer well.
However, we believe, as we always have, that the quality of advice is key and that mortgage intermediaries have an important role to serve in advising on specialist products such as self-certification and non-conforming mortgages.
Do you think that some lenders are pricing products against intermediaries (dual pricing) in order to reduce churn?
Thompson: The vast majority of lenders recognise and value the role of the intermediary but I have seen this happen recently. What I particularly dislike is one or two recent examples where a lender has priced stronger discounts and fixes for “direct to consumer”, leaving the intermediary in an embarrassing position of weakness.
Any lender engaging in this practice is taking an extremely short-term view of their distribution strategy, and completely overlooking the long-term value of the lender/intermediary partnership.
Maskens: There seems to be growing evidence that this is happening and it is a defensive move by the lenders to keep their mortgages in place. There is obviously a conflict with lenders wishing to court intermediary distribution but needing to increase average mortgage terms to cover high acquisition costs.
Consumers are also much more aware nowadays and able to test their rates against the market in any number of ways. More detailed disclosure during the sales process and product confirmation letters informing them of the dates where tie-ins and discounts end also serve to flag this opportunity.
Batchelor: We have not seen any evidence of this in our sector. However, when dealing with intermediaries it is inevitable that a much higher proportion of their business will be churned once any initial repayment charges have expired and so this must be factored into any lenders' product calculations.
Do you expect to see further increases in the base rate following November's increase of 0.25 per cent to 3.75 per cent?
Thompson: At the time of writing I think it is likely that we will see another increase. I would say, however, that even though many borrowers hold fixed rate mortgages, the market generally is more sensitive to interest rate rises than perhaps it has been historically, primarily due to the fact that, say, a 1 per cent increase in rate now is far more significant to most than it was when rates were higher. It will be interesting to study the impact of November's rate rise over the next month or two to see if this has had sufficient impact.
Maskens: The housing market is becoming overheated and the general economic conditions indicate a further rise in interest rates will be applied.
Batchelor: Yes. We constantly monitor swap rates and have seen two-year fixed-rate money increase by over 1 per cent in the last few months. This leads me to believe that the markets feel we have two or three more rate increases likely in the next year or so.
Stephen Maskens, manager, MGM Home Finance Response