The ONS has recently published employment statistics under the title UK Labour Market: July 2016 and the thing that jumps off the page is the rising number of self-employed people and the growth rate in self-employed roles. There was 31.7m people employed as at the end of May 2016 some 624,000 more than a year earlier and the overall employment rate is at its highest level since records began in 1971 at 74.4%. Compared to a year earlier the number of employees increased by 319,000 to 26.71m representing 84.2% of all people in work; the number of self-employed people increased by 300,000 to 4.79m representing 15.1% of all people in work. The remaining 0.7% were people on government supported training schemes and unpaid family related jobs.
You can see from the stats that the growth in self-employed jobs is increasing at a much faster pace than that of employed roles but it continues to be the case that self-employed people find it much harder to secure a mortgage than employees. Most mortgage lenders require more proof of employment from self-employed people than they do from employees with the most common difference being a 2-3 year history compared to 12 months for employees. Obviously, there is additional risk for the lender in taking on a self-employed borrower but I think the differential in the underwriting and documentation required is disproportionate.
A few lenders like Precise Mortgages specialise in catering for the self-employed and have the risk management processes and skilled underwriters in place to ensure a good outcome for both borrower and lender. The slightly odd situation is that many lenders want 3 years audited accounts from a self-employed person (which in practice means they have been trading for nearly 5 years) but if an employee of that same firm applied they would only need their last P60 and three payslips!
It isn’t just employment statuses that are experiencing significant changes housing tenure is also in the headlines; statistics out recently show that home ownership is at its lowest level for 30 years and that the housing crisis is moving north with Manchester seeing the biggest declines of any major UK city. This isn’t new news, the Private Rented Sector (PRS) has been increasing for 25 years and the success of the buy to let finance has been instrumental in this growth.
The PRS is playing an ever increasing role in Society and whilst it is undeniable that many people simply cannot afford to buy their own home there is also a sizable number of people that choose to rent. Once considered a tenure of last resort, dominated by students and younger generations, we are now seeing a more diverse tenant population. The sector does continue to be popular with those in higher education and young professionals, but it is also now a sector with more families and older generations too. Unfortunately our politicians continue to use the housing market to score political points and to win votes and the continued assault on the buy to let market and the demonisation of landlords needs to stop before serious and permanent damage is done. Buy to let gross lending in Q2 post the SDLT deadline is significantly down, most notably driven by purchase transactions which have declined by c50%.
I hope that politicians and policy makers will pause for breath before making any more fundamental changes to this increasingly important market allowing the market to assess the impact of tax changes, tighter underwriting standards and of course the uncertainty caused by the EU Referendum.
Precise Mortgages, the specialist lender, has made a number of changes to its buy to let product range available to brokers from today. The changes will strengthen Precise Mortgages specialist proposition in the buy to let sector and increase its market share.
Highlights of the range include:
• HMO rates reduced by up to 0.60%pa
• Ltd Company rates reduced by up to 0.55%pa
• New 2 year fixed rate at 2.79%pa with a 1.50% Product Fee available via L&G and SBG
• Core range pricing and fixed rate end dates refreshed
• Up to 10 properties, £5million with Precise Mortgages and unlimited with other lenders
• Rental calculation based on 125% of the higher of the pay rate or revert rate
Alan Cleary, Managing Director of Precise Mortgages said: “Traditionally the summer months can see business levels soften but we want to increase our market share and have positioned our new buy to let range to achieve that objective.”
Jane Benjamin, Head of Relationship Management at Sesame Bankhall Group, added: “These new products should be attractive to landlords who are struggling to get a buy to let mortgage from high street lenders. At a time when many landlords are uncertain about how the recent tax changes will impact on them, as well as not knowing when the next interest rate change is likely to occur, the stability of a fixed rate, coupled with the lower Product Fee will make these products attractive to a wider range of customers.”
Precise Mortgages, the specialist lender has launched a retention program for customers coming to the end of their initial fixed or discount deals and will be paying procuration fees when an intermediary is involved.
The lender says that it will be writing to eligible customers up to three months in advance to inform them that their initial rate is coming to an end and offering additional product options. The letter will clearly inform the customer that they should refer to their broker if they require advice. If the customer chooses not use a broker they will be able to transfer to a new rate on an execution only basis.
Where a broker gives advice and the customer switches to a new product with the lender a procuration fee of 0.25% will be payable.
Customers and brokers are able to choose from a 2 year fixed rate, 2 year tracker or a 5 year fixed rate, with all products having no lender fees. As the lender already has all the information it needs to complete the transaction, the process will be straightforward and will require minimal paperwork, no conveyancing and no underwriting.
Alan Cleary, Managing Director of Precise Mortgages says: “The numbers of customers coming to the end of their deals with us is quite small at the moment but will become significant in 2017 and beyond. We are in test and learn phase for the next six months and will make changes as appropriate. The one thing I am certain of is that this gives customers and brokers more product choices which I believe is a good thing.”
Jeremy Duncombe, Director of L&G Mortgage Club added: “This is good news for customers and brokers with Precise Mortgages doing the right thing and paying brokers for the work they are doing. Precise Mortgages join a growing list of lenders who are recognising the vital role of the broker in giving best advice to the customer when their rate matures. We expect more lenders to follow in making this the norm.”
Precise Mortgages, the specialist lender, has introduced a significant enhancement to its bridging lending process.
The introduction of an Automated Valuation Model (AVM) will bring significant improvements to the time that it takes for some bridging loan valuations to be completed, shortening the timescales to minutes instead of days. If the bridging loans fit the criteria below the customer will have the choice to use the AVM instead of a physical valuation at a fee of just £99, representing a significant cost and time saving.
An AVM will be optional provided the case meets the following criteria:
• Standard Bridge only
• Maximum Purchase Price / Property Value of £500,000
• Maximum Gross LTV of 50%
• AVM Confidence Level of A, B, or C
Precise Mortgages has spent several months assessing the risks and is confident that the criteria and controls in place are robust.
Alan Cleary, Managing Director of Precise Mortgages says: “Before we launched AVMs we checked how much of our existing bridging lending would have been eligible and, based on the prior 12 months of applications, we found that over 16% would have passed. Now that we have launched AVMs I anticipate that number to rise to 20-25%.
“This is a genuine win-win situation as customers with cases that qualify will be able to save time and money. The introduction of AVM will also streamline processes for all our underwriters, with improvements in completion times across a number of other cases.”
Having just implemented the MCD, which we spent a year getting ready for, I was looking forward to a period of relative regulatory peace and quiet.
Wrong again! Along comes CP11/16, aka underwriting standards for buy-to-let mortgage contracts. This time, instead of coming from the FCA it comes from the Bank of England’s Prudential Regulation Authority.
Anyway, after reading the paper front to back several times over, I am experienced enough in such matters to allow a period of reflection in order to let the implications set in and to think rationally, not emotionally.
Human beings are not very good at change so CPs tend to create a lot of knee-jerk reactions and quite a lot of hot air. I will focus on the impacts of the CP that are most likely to affect mortgage intermediaries although I should make it clear that the CP is directed at lenders, not intermediaries.
The interest coverage ratio affordability test should give consideration to all costs associated with renting out the property that the landlord is responsible for and any tax liability associated with the property. Lenders can take account of the borrower’s personal income when assessing affordability – this is subject to the same regulations as Residential lending in terms of income validation, expenditure data and credit commitments. The PRA does not expect lenders to reduce the minimum ICR requirement below 125 per cent.
Interest Rate Stress Testing
Firms must incorporate a minimum of a 2 per cent stress on either the initial or the reversion rate, subject to a minimum rate of 5.5 per cent being used. Fixed rate products of 5 years or longer do not require a stress rate to be applied which is consistent with residential lending and MCoB.
A portfolio landlord is defined as a landlord with four or more mortgaged properties – a specialist documented underwriting process is required for lending to portfolio landlords.
Taking data from the slide deck attached to the CP, it is possible to summarise the PRA’s market view in the chart below.
Our view is more conservative than the PRA’s, in that we believe that buy-to-let gross advances in 2017 are likely to be flat with the potential to drop 10-20 per cent before recovering in 2018/19.
Unregulated firms and non-banks
One glaring omission as far as I am concerned is that the CP only covers PRA regulated firms. Theoretically, unregulated firms might see a market to address customers failing the new rules.
However, it is expected that bond investors (remember non-banks are funded via largely by capital markets) and rating agencies will penalise such an approach, which will clearly be non-compliant with PRA policy.
Given the current difficult environment for funding a non-bank, it is considered unlikely that many will take this risk and cost for a relatively small market opportunity.
Furthermore, the PRA has already made clear that it would seek to extend the rules to firms outside of its jurisdiction if it considered that there was a material impact on the overall buy-to-let market.
Further, the Bank has just published a proposal for new buy-to-let reporting (from Q2, 2017).
It is interesting to note that all firms originating £20m+ per annum are captured, even if they are unregulated.
While this introduces further discrepancies in the regulatory oversight, it will mean that unregulated firms will be subject to specific scrutiny if they are active in the market and their policies fall outside the requirements that materialise from CP11/16. But will this level the playing field eventually?
Market fundamentals remain unchanged and the continuing lack of supply of housing coupled with a growing population is likely to continue to fuel house price inflation, making home ownership less attainable for many.
The CP proposals in respect of affordability and stress testing are likely to lead to a more resilient and stable market less sensitive to interest rate rises. These are sensible regulatory precautions which we largely support and believe are likely to be adopted.
Many landlords with low LTV and/or higher yielding properties will be unaffected by the affordability and stress testing proposals.
Smaller or new entrant lenders may perceive a larger barrier to entry in the buy-to-let market and therefore less likely to enter the market, especially by offering looser underwriting standards and/or lower pricing than the incumbent lenders.
Increased complexity in the underwriting process for portfolio landlords is the biggest immediate impact of the proposals. This will significantly impact larger lenders which have less flexibility to adapt to fuller underwriting procedures.
We expect to see some lenders withdraw or retreat from what is becoming an increasingly specialist market.