Bullish on buy-to-let

23 May 2011 | By Samuel Dale, Robert Thickett

Buy-to-let is fast becoming the area where mortgage lenders want to be and there has been a recent rush of entrants into the sector.

With the provision of social housing declining and a lack of available mortgages in the residential sector there is high demand for privately rented accommodation, making it an attractive proposition for lenders.

Capital Economics predicts that the private rental sector will make up 17% of the UK’s housing needs in the next five years, compared with 14.2% now. Even in the short term, rents are at record highs, voids at record lows and more lenders are competing in the market.

Norwich & Peterborough Building Society has re-entered the sector to join new lenders such as Metro Bank, Yorkshire Building Society and Santander, that are set to launch products this year.

All these players will be trying to dent the two dominant lenders, Nationwide and Lloyds Banking Group, that have an estimated 80% market share between them.
Last year Lloyds group revealed it would no longer supply loans to landlords who have more than three properties, or £2m worth of loans. By taking a step back from the market, Lloyds group seems to be offering the new players an opportunity to make an impact.

But Paul Howard, head of corporate accounts at Nationwide, seems in no mood to give an inch to the new competition.

“There are either new players coming in or others returning to the market, which we welcome, but that’s not impacting the volume of business we are doing because we have a strong franchise in the market,” he says.

Howard also draws attention to the fact that Nationwide has continued to lend during the crisis while others were forced to stop.

“We’ve got a good track record and a quality book that’s seen us through the most diabolical financial crisis we’ve ever seen,” he says. “The Mortgage Works is one of the principal players in the market and we’re doing the strongest mortgage volumes since the credit crunch, so we are having a good time.”

Howard started his career as a quantity surveyor before holding a string of jobs in finance, then settling at London and South of England Building Society in 1981.

From there he began a career in mortgages that has included work for Bank of America, Mortgages plc and, ultimately, at Portman Building Society as head of intermediary sales.

After the takeover by Nationwide in 2007, Howard was appointed head of corporate accounts. The role involves leading both the Nationwide for Intermediaries and TMW brands, which include branch, telephone, internet and broker sales.

As Nationwide is such a big player, buy-to-let takes up a lot of his time. Howard believes the market will be slightly larger this year and that TMW can take some of the market share from competitors.

“I think we could be taking market share from one or two others - we’ve got a broad product offering and we are seeing growth in the market,” he says.

There were £2.9bn of new buy-to-let loans in Q1 2011, a decline of 3.5% on Q4 2010, according to the Council of Mortgage Lenders’ data. But the drop was considerably less than the 11% fall suffered by the mortgage industry as a whole in the same period.

Lending criteria and characteristics changed little in the quarter, with the average LTV at 75% and the average minimum rental cover requirement at 125%.

Nationwide is one of the few lenders to go beyond the average and offer an 80% LTV on buy-to-let. But will it go further?

“Not in the foreseeable future but never say never,” says Howard. “We’re at 80% LTV now and we’re comfortable with that as it still leaves a 20% latitude. There are no plans to increase it.

“I think that’s probably where it should be - we would want investors to have some skin in the game and a 20% investment is about right.”

While Lloyds group restricted the number of properties for landlords last year, Howard says there are no plans for something similar at Nationwide.

“Each property has its own loan and we work on the basis that the property has to generate the income to support the loan so, in theory, you could do as many loans as you wanted,” he says.

“We don’t have a maximum number of properties but once someone has a total borrowing exposure of £1.5m, we carry out a full credit assessment. This will consider income and personal circumstances and then we’ll take a group, all-rounded credit decision.

“But as long as we’re happy to tick all the boxes, then we’re happy to carry on lending,” he adds.

Howard says Nationwide does not feel pressure to follow suit when other lenders such as Lloyds group tighten their criteria.

“If we find we’re the last man standing offering a particular product niche, not just buy-to-let, but interest-only for prime business, for example, then we make an assessment,” he says.

“But we’re not frightened of being the only player in one particular market. For example, we’re lending to limited companies - not many of our competitors are doing that.

“We’re lending on houses in multiple occupancy, not many lenders are doing those, and we’ve got refurbishment products and again, not many firms are doing that. We’re happy to be one of one as long as the credit risk is acceptable to us.”

He is surprised at how low the take-up of loans to limited companies has been at Nationwide.

“Limited companies account for less than 10% of our applications,” he says. “I’m surprised it’s not more as there are lots of reasons why someone might want to borrow on a limited company name. It’s still a comparatively minor part but it’s a useful tool for financial advisers and their planning.”

The lender is clearly willing to attract different types of borrowers and for landlords, it recognises that the two key reasons for investment are income and capital appreciation. “Most people realise that capital appreciation is going to happen over a period of time and that there is no such thing as a get-rich-quick scheme - the credit crunch taught people that,” says Howard.

“But I do think the fact that we’re not seeing strong house price inflation is holding back the market. When we start to see house prices lift, we’ll see a big upsurge in buy-to-let as people will want to get on that bandwagon.”

When this will happen is far from certain and the Nationwide house price index shows a housing market bumping along the bottom.

“Prices are going to bump along at that level for a while,” says Howard. “Until we start to see any upturn, which will come of course, prices are going to be suppressed in the buy-to-let market.”

With Hamptons International, Knight Frank, Acadametrics and Capital Economics all predicting price falls of 4% or more this year, any uplift may be some time away.

“Being a buy-to-let landlord is a good place to be as rents are increasing so yields are great,” says Howard. “Rental voids are reducing, so the period landlords might be without rent is reducing and there is massive demand.

“If you talk to any lettings agent they’ll have waiting lists from here to Timbuktu, so there are a lot of positives. With people finding it harder to get on the housing ladder, what else are they going to do? They will turn to renting. But those positive drivers would have even more effect if there was a bit of house-price inflation as well.”

In terms of the type of mortgages being sold, Howard says there is an even split between purchase and remortgage.

“There is a lot of remortgaging going on and we are seeing individuals looking to leverage on their portfolio,” he says.

“There are many professional landlords who don’t have any borrowings, have bought properties with cash and are now looking to raise funds against that and acquire other properties.”

The most popular product is the 80% LTV loan, which is used by landlords to add more properties to their portfolio.

“A lot of our investors like the 80% LTV deal because they want to gear up as much as possible,” he says. “We are still seeing that the shorter-term fixed rates are proving attractive.

“Interestingly, a big proportion of our lending is on the higher fee products. Charging the higher fee means the pay rate is lower because the products all price up the same. Therefore, because the pay rate is lower it’s better cash flow for the landlord as he’s paying less out each month in interest on the mortgage.

“And it also helps the rental calculation in the initial assessment of the loan, which is the whole reason we brought out the high-fee products in the first place. Landlords love them for those two reasons.”

We feel our book is tried and tested through the economic downturn and that gives us great confidence going forward

Howard receives some complaints from brokers over the higher fees but says Nationwide is not profiting from them. He says it is more about flexibility for landlords rather than the lender trying to make more money.

Throughout the downturn, buy-to-let arrears have remained lower than residential arrears and Howard says that helps the attitude to new lending.

“Clearly, arrears have increased as they have done everywhere but they’re still below market averages and they are falling, as they have been for some time now,” he says.

“We have a big appetite for new lending - if we’d had a bad experience we wouldn’t have. We feel our book is tried and tested now through the economic downturn and that gives us great confidence going forward.”

There have been accusations that Nationwide was not checking applicants’ incomes when other lenders made income checks but Howard says the Nationwide book has performed well.

“I’m not sure why there was the criticism given that we’ve underwritten this way for over 10 years now,” he says. “It’s a seasoned book and it’s the income of the person’s property, not their personal income, that will repay the mortgage - that’s what it’s all about. It’s tried and tested and works well.”

The current European directive on credit agreements for residential mortgages includes buy-to-let properties within its scope and there has long been talk that the Financial Services Authority may one day turn its attentions to the sector.

Perhaps the reason other lenders are checking the income of borrowers is because of the future possibility of buy-to-let regulation.

“I don’t think that’s why other lenders check income,” says Howard. “I think it’s just their credit stance and to each their own. The stance we take is well tested and has delivered a high performing book.”

Howard says there are no concerns at Nationwide about the European directive and adds that they will interpret it as and when issues arise. As a former head of intermediary sales, Howard understands brokers but is proud of all the channels on offer.

Nationwide for Intermediaries sells the society’s prime mortgage products across all its channels - brokers, branch, telephone and internet.

“All our products are priced the same across the channels to which they are available,” says Howard. “So a two-year fix is the same in branch as it is for intermediaries.

“There are a small number of deals that are only available via one channel, such as the save to buy product, which is available through branches only. It is about helping first-time buyers build a savings habit and a relationship with their local branch then coming back with a deposit to get a mortgage. We felt that was a branch product.”

But there are broker-only products too, particularly at TMW in its prime product range, where the deals may appeal to brokers’ clients.

“TMW’s prime range has products with lots of features that would be particularly attractive to intermediaries,” says Howard. “For example, there are flat fees, percentage fees, caps, trackers. They are priced similarly to Nationwide’s prime products.”

Howard believes save to buy is a throwback to the old values of mutuality and banking but says there are no plans to open it up to brokers.

“We’re happy with it as a branch product,” he says. “When I joined London and South of England Building Society, this is exactly what I was doing. I was asking customers who wanted a mortgage whether they had an account with us. If they didn’t, then I told them to open one and come back when they had saved a deposit for a mortgage.

“We’re a mutual organisation and owned by our members. Our purpose is to assist our membership into home ownership: that’s our sole purpose for existence.”
The society model, though, has been in decline recently with a flurry of mergers and takeovers consolidating the sector into just 48 building societies.

Nationwide alone has taken over troubled Scottish lender Dunfermline as well as Cheshire and Derbyshire building societies since the onset of the crunch.

But Howard believes this is a longer trend that goes beyond the recent crisis and that the societies remain strong and viable.

“There has been consolidation for the past few decades,” he says. “In the 1980s there were over 150 building societies and that decline will continue even now. But I believe the mutual model is one that has value and is trusted. I think consumers like the building society ethos.”

Howard accepts that there is some confusion about the difference between building societies and banks.

“Sometimes people get confused and we are doing our bit to let them know what the difference is between the two,” he says. “Our slogan is proud to be different and it’s about us trying to deliver the values we believe in.”

As the most dominant mutual and one of the five biggest mortgage lenders in the country, Nationwide is integral to the mortgage market. It is an even bigger presence in buy-to-let and while the signs may point to a strong future for the sector, the lender will face more competition.

But after lending through the crisis and offering high LTV deals, Nationwide believes that it is well placed to take advantage of buy-to-let opportunities.
So it seems the new entrants will have a tough job making inroads into the sector as the lender is in no mood to give up market share.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat