Having a section dedicated to this specialist area signals that buy-to-let remains an important market for lenders and brokers.
During the credit crunch detractors of buy-to-let attempted to tarnish the industry with the same brush as sub-prime. These attempts have proven unfounded. Instead buy-to-let continues to show resilience and has often been described as a shining light in what continues to be a challenging housing market.
Last year saw many new entrants to the lending market. As a result the buy-to-let space has become increasingly competitive. Paragon Mortgages recently reported that almost a quarter of brokers’ business is buy-to-let.
And in the February 20 issue of Mortgage Strategy five out of eight lender advertisements were aimed at buy-to-let.
To remain competitive and increase market share lenders need to target more niche areas.
One example is large buy-to-let mortgages. Most lenders cap their lending at £350,000 or reduce their LTV significantly at this level, but this limits lending for higher value properties. These are most common in the London area.
In 2011 annual house prices in London experienced a 2.7% increase, with the average house price in London at £345,208. Higher property prices in the capital make it harder for first-time buyers to buy property, creating strong rental demand as evidenced by London having one of the lowest void periods in the country – 2.4 weeks.
A lending cap of £350,000 creates the anomalous situation whereby investors in high quality London properties cannot obtain sufficient funding for properties despite their high rental demand and resilience to falling prices.
Strong house prices and high rental demand are characteristic of the London market and are fundamental to any successful property investment. Existing lending criteria is counter-intuitive and deters many potential investors from putting their money in higher value properties.
The reason for the restriction from a lender’s perspective is that there is a higher probability of defaults on higher value properties if a landlord faces void periods, given the size of the mortgage and the associated costs.
This is certainly true of a large house worth £750,000 in the Cotswolds which has less rental demand and requires a certain type of tenant.
However, this is less true of a Victorian house in Kensington of the same value, where the strong rental demand will mitigate the risk of void periods.
The restriction has benefited private banks and boutique lenders that are more open to larger mortgages and have taken business which should fit nicely on the books of mainstream buy-to-let lenders.
However, some lenders have started to take note. Platform has recently put together a proposition to cater for high value properties while BM Solutions still leads the way in this area with a maximum loan size of £1m at 75% LTV and rental cover at pay rate.
Aldermore and Northern Rock are also beginning to be competitive at this level. If lenders are looking to increase volumes and harness good security this niche area needs to be targeted.
Product-wise, in the vanilla market space Clydesdale’s 4.49% two-year fix at 80% LTV with a flat fee is market-leading but with the likely rush of business, service will need to be monitored. It is also worth noting that at 80% LTV, a repayment vehicle must be in place, something not usually associated with buy-to-let.