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Whose default is buy to debt?

Our panel consider the default rates on high-LTV BTL loans, the growth of Santander and the entry of Metro Bank

The panel

Michael White chief executive, Email Mortgages
Fahim Antoniades group director, Mortgage Centre IFA
Jonathan Clark mortgage partner Chadney Bulgin

The FSA found that the default rate for buy-tolet mortgages with LTVs between 90 per cent and 95 per cent is 8.13 per cent compared with a 2.56 per cent default rate for prime loans. Is this a surprise and do you think arrears on buy-to-let loans are set to rise further?

White: It is certainly not a surprise and many would argue it is simply clarification of an obvious point, given that borrowers who have investment properties with little equity or indeed negative equity will be the first to default in difficult times.

A large proportion of the delinquent borrowers will be amateur landlords who have suffered particularly badly over the past two to three years. However, the situation would have been considerably worse if interest rates had not fallen to 0.5 per cent.

I do not believe arrears are set to increase much further, with property prices stabilising and the cushion of continuing low rates being maintained.

Antoniades: The fact that default rates on high-LTV buy to lets are three times higher than prime lending is a clear signal that, in difficult times,
those who are financially strained would rather use their limited resources to pay for the roof over their heads first. That is why issuing a loan to a non-professional who is not reliant on the safekeeping of their portfolio in order to make a living was an invitation to trouble.

Clark: We would expect the default rate on BTLs to be higher than residential but 8.13 per cent is still an alarming figure. Rental yields in most parts of the country have been fairly constant, so interest costs must be a major factor here, often a result of first-time landlords having being tempted into the market with honeymoon rates on 85 per cent and even 90 per cent borrowing.

Many purchased newbuild flats from developers that skewed the true values with gifted deposits and so now have negligible (or negative) equity.

Inexperienced landlords faced with void periods, maintenance costs and rising mortgage payments are always going to let their BTL investment suffer in favour of their primary residential commitment.

Several lenders have recently announced plans to offer complex prime mortgages. Is this evidence of lenders making sensible market decisions or is this simply an example of lenders not having learned their lessons from the sub-prime mortgage crash?

White: This is lenders very much making sensible market decisions. Unlike the overly interventional theorists at the FSA, I believe competition
remains key to the mortgage market and the wider economy. There cannot be perfection in terms of credit risk avoidance and certainly not following the worst recession in living memory. Anything that increases the possibility of more finance options and availability for clients has to be embraced as a step in the right direction.

Antoniades: A recent report from Fitch showed that fast track posed no greater risk than income-verified loans – this is strong evidence that
credit-scoring works. We have swung too far in the other direction where people are being declined for what I would deem to be mitigating circumstances, such as a catalogue default issued in between address changes. As long as the complex prime range allows for a good mix of
credit-scoring and common sense, then I see this as distinct from the type of sub-prime that led to the crash.

Clark: Complex prime products are an essential part of a balanced mortgage market and need not be feared if managed correctly. Increasingly sophisticated credit management systems mean that lenders should have a good idea of the risks associated with any type of lending and they are bound to be tempted into what can be a very lucrative market. High-street lenders have become increasingly hostile to self-employed applicants or those with a very limited adverse credit history and this has created a void that needs to be filled, cautiously, of course, and with money only being lent to those who can clearly show evidence of affordability.

Some state-funded banks are charging higher than average mortgage rates, according to figures from Should these banks be offering more competitive deals?

White: State-funded banks are essentially caught between a rock and a hard place. Having taken Government money to survive, their priority has been improving their balance sheets so they will not require further rescue packages, which does not marry up with the provision of competitive mortgage products. Also, the Moneyfacts’ figures were not all bad, with RBS performing well and those who were up to 40bps adrift still providing a relatively comprehensive range and good customer service – let’s not forget, it is not just about the headline rates.

Antoniades: Quite simply, state-funded banks have a finite amount of time to repay the bailout money to the taxpayer. To do so, they have to try to recapital ise as quickly as possible while at the same time bearing political pressure to lend more in order to meet expectations.

They would argue that the margins at which they have to operate are high because the balance between when to payback and the freedom to lend is in favour of the former and not the latter.

Clark: State-funded banks need to make a profit just like any other (especially if they are to be returned to the private sector and the Government’s huge investment repaid) but this should not be at the expense of existing mortgage customers, many of whom are unable to switch lenders, with high LTVs and stricter criteria.

Current margins should llow for competitive rates and profits. These banks should also be making it easier for people to borrow while taking advantage of incentives such as shared ownership.

Santander is reportedly leading the pack to buy 320 RBS branches, which would bring its high-street presence to more than 1,500 UK branches. What effect would this potential acquisition have on the mortgage market? Would brokers suffer further from a homogenisation of the high-street banking sector?

White: Santander has not signalled any intention of working outside of intermediaries and the current strategy is quite the opposite in working closely and continuing to build important mortgage distribution with the broker sector.

In this context, the additional 320 branches increases the opportunity to attract new high-street customers but it also facilitates, perhaps more
importantly, a bigger play in the small business sector which is equally crucial to one of Britain’s fastestgrowing banks.

Antoniades: Monopoly, as we know, stifles innovation, choice and service. We are not talking about a monopoly here but market dominance
can have the same effects. It remains to be seen what their strategy will be to support so many branches but I would be surprised if this did not continue to incorporate a direct-to-consumer mortgage proposition.

We are nearing the point where it becomes a numbers game for the big banks – a service by science where the more people they process, the more products they sell while service and choice takes a back seat.

Clark: Santander’s rise seems unstoppable at the moment and further high-street branches would seem unnecessary to many but anyone who has ever visited Spain will understand what they hope to achieve.

We can expect them to continue with the now familiar combination of aggressively priced mortgage products coupled with strict underwriting but the increased dominance of a few lenders and a reduction in the number of providers is fundamentally bad news to a mortgage market that
has already contracted massively over the past couple of years.

Metro Bank last week got its FSA banking licence and will soon open several branches in London. Can brokers expect Metro Bank to be a new ally or foe in the mortgage market?

White: On the question of friend or foe, I am unable to comment at this stage as the whole enterprise has yet to get going and we are relying on PR information. I suspect it will need some time for the dust to settle on its true business focus.

This is not a bank that is likely to cause the mortgage broker community any issues in the short term but I would hope that in time Metro Bank will recognise the benefits of working with mortgage intermediaries and become a new ally, similar to new entrant Aldermore.

Antoniades: Metro Bank promises to deliver the type of personal touch currently only available to private banking clients. The arrival of new competition that does not carry the excess baggage of the bailed-out banks nor the mass-market approach should be received as positively.

In this regard, I see Metro Bank more as an opportunity as a banking customer than a threat as a broker. We need to move on and remember that our added value rests on the words, whole of market and advice.

Clark: Both the Government and the FSA made it quite clear they would welcome new providers into the UK highstreet banking market but it is
taking a long while to happen.

Metro Bank have set their stall out to provide a highquality, more bespoke service to their customers but this will not allow the most competitive
rates to be offered to savers or borrowers. Any lending is likely to be largely or wholly deposit-based initially and is unlikely to be made available
to intermediaries for some time, if at all. They are therefore unlikely to be an ally or foe to brokers but anything that shakes up the high-street
banks has got to be good for the industry.


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