CREDIT CRUNCH ‘LIVE’
As a landlord you want to know what really is going on out there in the property investment world. Unlike other landlord websites that regurgitate meaningless news feeds with empty headlines like ‘buy-to-let still booming’ which anybody with half a brain knows is far from the truth. We at Property Hawk are committed to getting ‘down and dirty’ and finding what’s really going on.
Where do professional landlords get their buy-to-let insurance from?
This week we look at how the ‘credit crunch’ is impacting on the buy-to-let mortgage market to find out what it’s like being a landlord trying to get a mortgage after ‘le crunch’.
The tale of the incredible disappearing mortgages
The facts of the matter are stark. Moneyfacts the leading online provider of financial information revealed this week that this time last year there were over 3000 buy-to-let mortgages on offer; this week this number had shrunk to just over 600. This may on the face of it sound disastrous. However, landlords should not necessarily despair about this reduction in choice. Many of the mortgage products that were previously offered were duplicated many times over by buy-to-let mortgage providers. The result was an almost overwhelming array of choices and products which meant choosing a buy-to-let mortgage was incredibly confusing for landlords who were looking at going it alone. Now a landlord who wants to find their own buy-to-let mortgage can do it far quicker and more simply than before.
More ‘creative products’ disappearing
Where landlords have suffered is with the removal of some of the more ‘creative’ financial products. For instance some landlords buying so called Below Market Value (BMV) properties were able to bridge and remortgage. This is where a landlord who is able to pick up a BMV properties and buy it using bridging finance then on completion would remortgage against the current ‘market value’. This often allowed a landlord to buy an investment property with effectively no equity invested in the property. Property Hawk learned this week that the last BTL lender, Mortgage Express to do these same day remortgages has exited from the market now leaving little scope for landlords to finance so called BMV deals unless they are able to purchase using cash or other lines of credit.
Re-pricing of risk
What is more of an issue for most landlords is the so called re-pricing of risk. Property Hawk did warn landlords early on in the ‘credit crunch’ that if they were looking to refinance their buy-to-let property, they should do it immediately.
This warning has been borne out by my own personal experience. I was very fortunate to re-mortgage part of my property portfolio early last year following the end of the term of the fixed rate products. This was fortunate because ‘pre-credit crunch’ I was able to secure margins above the Bank of England base rate which landlords could now only dream about.
For instance several remortgages were done with Bank of Ireland at 0.45% above the Bank of England base rate giving me a now seemingly incredible pay rate of just 5.45%. I am looking at remortgaging another property in the summer after the expiry of a fixed rate of 4.99%. This is going to be painful as the likely margin above the base rate is likely to be at least 1% and more likely to be 1.25-1.50% above base if high set up charges are to be avoided. With this in mind I decided to consult a panel of leading buy-to-let mortgage brokers to find out whether they could give me any tips about how to secure the best buy-to-let deal in the current challenging environment.
Expert buy-to-let brokers panel
I started by speaking to Lynsey Sweales at The Money Centre. Her advice was to apply early. This is because with the deteriorating conditions in the buy-to-let market the deals that are currently available may not be in several months time as the more attractive rates and products are withdrawn. This means a landlord should apply early, probably 3-6 months before the end of a fixed term in order to secure a buy-to-let mortgage offer. A landlord would then have certainty about the type of mortgage they will be able to swap to on the expiry of their fixed term product. If in the meantime a more attractive mortgage was to appear on the market, then a landlord is still able to swap to the new product. There is a risk for a landlord who does this in that ultimately the mortgage company is within their rights to withdraw their mortgage offer at any stage. This would result in the landlord forfeiting their application and valuation fees. In Lynsey’s experience this does not happen. On the question as whether to go for a fixed or floating rate Lynsey has opted for a variable rate for her portfolio given the likelihood that interest rates are still heading down. The reality for a landlord is this decision is going to depend largely how risk adverse they are to the possibility that interest rates will rise over the next few years and how critical this is to the sustainability of their buy-to-let investment. Those landlords with strong positive cash flows are more likely to be prepared to take the risk of subsequent interest rate rises.
Headline grabbing products
The other thing that landlords need to be aware of is are that BTL mortgage lenders are being very wary about releasing attractive buy-to-let mortgages because of the lack of competition these lenders get swamped with mortgage applications that they can not cope with. Jonathan Moore marketing director at Mortgages For Business (MFB) one of the UK’s largest buy-to-let brokers reflects that:
"There are fewer Buy-to-let lenders currently operating in the marketplace and the remaining lenders are increasingly risk adverse focussing on quality applications. Due to the fact fewer lenders are operating in the market many are being flooded with mortgage applications and as a result there is an increasing emphasis on filtering process. We’ve had examples of borrowers being refused by lenders they have used in the past through factors such as the structure of a limited company or credit score."
Buy-to-let lenders are instead choosing to release small tranches of money and offering exclusive products through selective brokers such as The Money Centre knowing that this way they will not be swamped by business and that the dedicated brokers will handle the application process for them.
Credit crunch ‘latest’
Jonathan Moore at Mortgages For Business (MFB) has witnessed at first hand the rapid reduction in buy-to-let mortgage products. At one stage MFB were able to access over a 1000 products, now this is down to just over 300. One of the biggest victims of the contraction in lending has been owners and buyers of new building residential investments. These are classed by lenders as properties less than 12 months old. Jonathan revealed that previously there were tens of providers prepared to lend on this type of investment. This has come down to 3 in recent weeks: Mortgage Express, Astra, Bank of Scotland. Lenders have also become very strict in relation to any developer gift deposit and discount and strictly apply the rules relating to Market Value 85% has become the ‘new 90%’. For the last few years 85% was the standard maximum Loan to Value (LTV) that a buy-to-let lender would advance with a few lenders being prepared to go up to 90%. These have gone and now the standard loan to value is down to 75-80% with a few of these lenders being prepared to go up to 85%.
Things to watch out for……
Jonathan warns landlords about being suckered in by low headline mortgage rates which often come with high initial set up costs and fees. Landlords should pay close attention to the Annual Percentage Rate (APR) figures associated with their buy-to-let mortgage.
One of the biggest changes that he has witnessed is the lenders attitude.
“Twelve months ago lenders were falling over themselves to lend. Now it has gone the opposite way where the same lenders are almost looking for reasons to turn a landlord’s buy-to-let mortgage application down.”
In his experience the most common reason for a landlord to have their application rejected is a failure of their property to ‘value up’. Therefore, his advice is that:
“It is absolutely essential investors get up to date localised comparables and are
realistic about rents and property valuation.”
The Nationwide has just announcing the six consecutive falls in monthly house prices and valuers are being instructed by mortgage companies to value conservatively.
Landlords should therefore remember that when assembling these comparables they should only use recent sale figures and given that prices now generally appear to be falling, any valuation of their property should account for this in their calculations. If no up to date sales figures are available to a landlord they can always use information from property marketing sites such as Right Move and Property Finder to gauge the value of their investment property. Again landlords need to be cautious about using figures taken from these marketing websites as they list the properties asking price not the sale price. In the current depressed market the latter is likely to be as much as 5-10% above any achievable sales figure. Mortgage surveyors will be aware of this and factor this into their valuations.
Property Hawk has come across some novice investors who make the mistake of trying to overvalue a potential investment property to get the deal to fit. However, landlords that do this risk having their application turned down and will potentially missing out on securing an investment or an attractive mortgage product.
One way to help an application go through is to use a mortgage broker that is also a mortgage packager. A mortgage packager is a company such as the specialist lender Trustguard who handles most of the application process in house and therefore has more control over the buy-to-let mortgage application. Using a packager allows a landlord to speak with the broker who in turn can discuss with the mortgage surveyor about the details of a property to get a view as to whether a proposed investment property will value up before a landlord goes to the time and expense of submitting a buy-to-let mortgage application.
A landlord’s buy-to-let challenge
A landlord therefore needs to rise to the buy-to-let mortgage challenge and ensure they locate the best deals and then be able to secure these products before they are pulled or become oversubscribed. Personally I have already started my search for a replacement to my fixed rate mortgage. I’ve been using the BTL Search Facility to find the best rates. Then, I’m going to see if any of the panel of leading mortgage brokers can beat the rate with their exclusive products. I want to apply early to make sure that I’m not left high and dry with the Mortgage Express standard variable rate which is a highly unattractive 7.25%.