BTL crackdown should help lenders to diversify
A torrent of defensive articles about recent changes to buy-to-let taxation and stamp duty has already started. The Institute for Fiscal Studies warns that these changes will “make rental properties more expensive and discourage their purchase”.
But isn’t that precisely the aim of the Government’s policy? And isn’t it likely that, if the changes so far do not achieve that objective, regulatory intervention will follow?
Why is this? First, politically they need to change the balance between renting and ownership (after all, they are Tories). Second, they have no intention of letting newly liberated pension pots flood the housing market, arguably a diversion from the ‘real economy’. Third, they have the same concerns as regulators about the economic impact of a too rapidly growing buy-to-let market.
Having been involved as a lender in buy-to-let since its inception in the late 1990s, I understand the concern of lenders and brokers. It is always annoying when a party is stopped just as the fun takes off. By all means let us sound off if it makes us feel better. But wouldn’t it be sensible also to face up and move on? Many lenders and brokers have filled their boots on buy-to-let. Some challenger banks have grown almost exclusively on the back of an ever fatter rental market.
I am not predicting the end of buy-to-let; simply that, after a final stampede to next April, it will flat-line. So where are the growth alternatives? Buy-to-let has been so easy that many lenders have lost the owner-occupied product development skills they need.
There are many opportunities coming out of regulation and the MMR if only we could stop seeing them as ‘compliance problems’. Regulation does not stop us doing mortgages for the self-employed, contractors, self-builders, custom-builders, into retirement, with credit blemishes, etcetera. We all know there are ways, for example, to construct prudent and helpful low-start mortgages. We just need the will and the skill.
Maybe without the easy growth and margins from buy-to-let, lenders will at last spread their development focus more evenly.
A regulatory ‘sandbox’ would spur innovation
We talk a lot about the mortgage market and its ability to function, be competitive and offer the solutions borrowers need when buying or remortgaging property.
Perhaps an area that gets neglected is the regulatory framework that all lenders must work within to get to the point where they can design, innovate and deliver mortgage products.
Regulation must deliver all the required protections but also needs to be workable and an enabler to allow practitioners to function effectively. For this to happen, a degree of leeway is necessary within the regulatory structure. Not every possible eventuality can be regulated for.
This point was raised by Paul Smee at the recent CML Conference when he talked about “single-minded regulators” aiming for a kind of regulatory perfection that might prevent the efficient functioning of the market.
I am sure the regulator would say there is a fine line between achieving both and it can be a difficult ask, especially as one is never sure how regulatory theory may play out in practice.
It makes recent talk of a ‘regulatory sandbox’ particularly interesting because this would seem to set up a system whereby providers of all financial products could test and trial new services and products without being wholly subject to the gamut of regulation.
This could encourage greater innovation and appetite, particularly in mortgages, to look at product areas that ordinarily may not be deemed worth the risk because of the potential for regulatory censure if the product does not work out as anticipated.
‘Regulatory perfection’ is unattainable but such a system may allow lenders some breathing space to enter new market sectors, or to develop much-needed products in existing sectors. They are certainly required in areas such as first-time buyer products, finance for older borrowers or shared ownership.
Borrower needs are changing as they react to market developments and lenders must move at the same pace. The provision of a framework that sits outside regulatory sanction could be the spark to encourage lenders to push on with innovation.
Pad Bamford, Genworth Financial