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Q2 2019

Buy to Let Mortgage Index Q2 2019

Buy to let mortgage lending trends Product pricing Effect of underlying cost of funds How fees & charges affect pricing

Personal versus Ltd Company borrowing


INTRODUCTION

About this index Previous Indices Combined Here at Mortgages for Business we track and analyse developments in the buy to let mortgage market to help landlords and property investors make informed investment finance decisions. First published in Q1 2018, the Buy to Let Mortgage Index combines four indices •

Buy to Let Mortgage Product Index

Buy to Let Mortgage Costs Index

Complex Buy to Let Index

Limited Company Buy to Let Index

To see the results of any of the previous indices, please visit the news and insight section of our website.

Data & Methodology Lenders and products The information contained in this report is obtained from Mortgage Flow, our proprietary buy to let mortgage product sourcing system. Lenders tracked in the index are chosen for their active contribution to the market and include market-leading mainstream providers, the challenger banks and the specialists which cater to full-time portfolio landlords with complex borrowing requirements. Some lenders and products have been excluded, typically those with bespoke offerings and products only available on properties in smaller, regional areas.

Interest rates In order to track buy to let interest rates, 12 “standard” product ranges have been selected. These are two, three and five year fixed rates and discounted/tracker (variable) mortgage products, at both 65% and 75% loan to value. Effect of fees & charges on headline rates The total cost of the mortgage (including lender arrangement fees, valuation fees and legal fees) has been calculated over the period of the variable or fixed rate and this has been used to generate an annualised cost over that period. Calculations have been based on a “standard” mortgage of £150,000. This result can be markedly different from the APRC measurement which fails to recognise the effect on borrowing costs of borrowers remortgaging once the period of the discount or fix has expired.

Where individual mortgage products offer “free” arrangement fees, valuations or legal fees this has been recognised in the calculations of costs for those products. Including these costs more accurately reflects the costs of taking on a buy to let mortgage without distortions caused by the way that lenders have structured fees on their products to meet marketing requirements.

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INTRODUCTION

Transactions Transaction data is based on buy to let mortgage applications and completions submitted via Mortgages for Business. This proprietary data is held within our CRM database and includes information on purchases, remortgages, property type, property value, loan amounts, loan to value, rental income and gross annual yields.

Jargon Applications Full buy to let mortgage applications that have been submitted to the lender but not yet completed, i.e. in progress. Case count The number of buy to let mortgages being transacted via Mortgages for Business, i.e. application and/or completion.

This is a single building with multiple, separate, independent residential units owned under a single freehold title. Examples include purposebuilt blocks of flats or Victorian/Edwardian houses converted into flats. Semi-Commercial Property Also known as mixed use investments, as both names suggest these properties are made up of part commercial and part residential elements, typically shops or offices with flat above. Vanilla Buy to Let These are standard buy to let transactions. Properties in this category tend to be normal 2-3 bed houses and 1-2 flats. Both borrowers and properties fit the general lending criteria for offthe-shelf products offered by the mainstream buy to let lenders.

Completions Buy to let mortgage applications that have been formally offered and drawn down. This includes remortgages. Houses in Multiple Occupation (HMO) A house in multiple occupation (HMO) is a property that is rented out by at least 3 people who are not from 1 ‘household’ (for example a family), but share facilities such as the bathroom and kitchen. Multi-Unit Freehold Blocks (MUFB)

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LENDERS & PRODUCT NUMBERS

Lenders & Product Numbers 45 (+6) Total BTL lenders 27 (+7) BTL lenders with mortgage products for Ltd companies 1,711 (-213) BTL mortgage products 572 (+5) BTL mortgage products available to Ltd companies In Q2, six more lenders are being tracked than in the previous quarter, with Fleet Mortgages returning to the BTL market with a revised product range. Other lenders include Buckinghamshire Building Society, Hampshire Trust Bank and Masthaven, who have been added to the index for their strong contribution to the sector. All of these lenders have products for limited companies. This now means that 59% offer products to limited companies vs lenders who don’t, up from 49% in Q1 2019. The addition of these lenders also means that the proportion of products available to limited companies has increased from 29% in the last quarter to 33% in Q2 2019. The total number of buy to let products fell by 213 largely due to Keystone Property Finance and Zephyr Home Loans consolidating their product ranges in Q2 2019. However, an upgrade of Mortgage Flow, our bespoke buy to let mortgage product sourcing system, also rationalised the way in which individual products are counted to provide a fairer reflection of market availability.

BTL Mortgage Lenders

BTL Mortgage Products

43% 75%

Lenders offering products to Ltd Co borrowers

Products available to Ltd Co borrowers

Lenders with no Ltd Co products

Products available to individuals

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LENDERS & PRODUCT NUMBERS

Buy to Let Mortgage Lenders As the graph demonstrates, there is a direct correlation between the growing number of lenders operating in the buy to let market and those offering products to landlords using limited companies.

Buy to Let Mortgage Product Numbers Since Q1 2018, there has been a greater increase in the number of buy to let products (despite lenders’ product consolidation, seasonal fluctuations and our recent rationalisation of the way in which individual products are counted). This increase has been fuelled by new options from lenders catering for the specialist end of the market such as portfolio landlords and those with more complex borrowing requirements.

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RATES & PRICING

Rates & Pricing Rate Preferences

Fixed or tracker rates? 2 Year Fixed Rates Gaining Popularity Fixed rate products remained far more popular than variable rates (i.e. trackers), with 95% of landlords choosing to fix when taking a buy to let mortgage in Q2 2019. Five year rates, in particular, continued to be the most popular fixed product choice, accounting for 72% of all BTL mortgages taken out in Q2, up from 71% in the previous quarter. The popularity of these rates is partly due to the less stringent stress tests which lenders are permitted to apply (to all BTL products of five years or more), which increases the amount that landlords can borrow when compared to a similar shorter-term products. Two year fixed rates were the second most popular choice amongst landlords and growing in demand, up to 21% from 18% in Q1 2019 and just 8% in Q4 2018. The rise in popularity is likely due to increasing demand from cash-strapped landlords who may believe that Bank Rate is unlikely to rise any time soon, after Mark Carney indicated that it could be lowered! (Two year rates are cheaper to service on a monthly basis).

Product transfers onto two year fixed rates are also increasing in popularity because they are a relatively quick process compared to remortgaging with a different lender. They work particularly well for landlords looking to borrow on a like for like basis. (Despite being quicker, it should be noted, that switching products is not necessarily the cheapest option for borrowers). Fixed Rate Buy to Let Mortgages Term

Q1 2019

Q2 2019

Average 5 year

3.58% (=)

3.51% (-0.07)

Average 3 year

3.04% (-0.29)

2.78% (-0.26)

Average 2 year

3.14% (+0.06)

3.09% (-0.05)

Tracker Rate Buy to Let Mortgages Term

Q1 2019

Q2 2019

Average 5 year

3.03% (+0.20)

3.09% (+0.06)

Average 3 year

3.51% (-0.06)

3.53% (+0.02)

Average 2 year

3.04% (+0.06)

2.93% (-0.11)

Av. Term Tracker

4.13% (-0.40)

4.00% (-0.13)

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Pricing On average, pricing remained fairly constant in the quarter, although fixed rates fell slightly overall. In particular three year fixed rates fell the most, by a quarter of one percent, and on average remain cheaper than their two year counterparts. Despite this, these products only account for 2% of the market. The impact is therefore likely to be negligible. There was a greater degree in movement of pricing on tracker products, particularly term trackers which have been less popular generally in the current economic climate. Their pricing has fallen considerably over the last few years as the graph demonstrates. In Q2 2019 it fell to an average of 4.00% from 4.13% in the previous quarter.


RATES & PRICING

Pricing trends

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RATES & PRICING Pricing of products available to limited companies

Products available to Ltd Companies1 Q1 2019 Products

No

Q2 2019

Rate

No

Rate

Variable

79 (-47)

4.0%

74 (-5)

3.9%

2 year fix

219 (-26)

3.6%

225 (+6)

3.7%

3 year fix

28 (-42)

3.6%

21 (-7)

3.4%

5 year fix

237 (-40)

4.1%

155 (-82)

3.7%

Total (av)

5632 (-155)

3.8%

5732 (+10)

3.7%

1 Includes products available to both personal & corporate borrowers and products designed exclusively for corporate borrowers. 2 Table total may also include 1, 4, 7 & 10 year rates

Pricing: Ltd Co Products vs All BTL Mortgages

Average Prices All BTL mortgages:

3.1% BTL mortgages available to Ltd companies:

3.7%

Why rates to limited companies seem higher Rates available to landlords using limited companies were generally higher than the market average. This is because the cheapest buy to let mortgages are typically offered by lenders without the systems or underwriting skills in place to offer products to limited companies (i.e. they only offer to landlords borrowing personally).

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UNDERLYING COSTS

Underlying Costs BTL Fixed Rate Margins Over Swaps Q2 2019 Terms

High LTV

Medium LTV

5 years

3.3% (+0.2%)

2.5% (+0.1%)

1.8% (+0.1%)

3 years

2.7% (-0.2%)

2.0% (-0.1%)

1.6% (+0.1%)

2 years

3.1% (+0.2%)

2.2% (+0.1%)

1.6% (+0.1%)

Swap Rates Typically, fixed rate buy to let mortgage products follow the trend for the swap rate of the same term, with the addition of the lender’s operating margin. However, for the second quarter in a row, this has not strictly been the case. Indeed average rates have, in the majority, remained the same or increased slightly. This may be for a variety of reasons such as: • Rates are already relatively low • Financial uncertainty surrounding ongoing

Low LTV

Brexit negotiations has made lenders cautious in reducing rates further • Incentives are being offered in other ways e.g. free valuations, reduced fees.

Bank Rate Any rise in Bank Rate would mean that borrowers would pay more each month for tracker and variable rate products. The good news is that in June, the Bank of England’s Monetary Policy committee voted unanimously to maintain the rate at 0.75%. The next review will be on the 1st of August 2019.

Bank Rate, Swaps & 3-Month LIBOR

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FEES & CHARGES

Fees & Charges Amount fees & charges add to the headline rate Lenders reduce their margins again Overall, lenders’ margins fell very slightly in the quarter to 0.54% from an average of 0.55% in Q1 2019. Although small, this is still good news for landlords. Low loan to value products fared the best, with margins dropping below the 0.5% mark (0.48%) for the first time since Mortgages for Business started tracking in 2013.

Effects of Fees & Charges on BTL Mortgages

Lender arrangement fees Q2 saw an increase in the proportion of fee-free and flat fee-based products, to the detriment of percentage-based fee product options. The reason for the shift in fee options may be reasonably thought to be linked to lenders vying for business in a challenging market.

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FEES & CHARGES

Lender Arrangement Fees in Q2 2019

Lender Arrangement Fees on BTL Mortgages Fee Type

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Fee-free

20%

18%

20%

22%

% based

44%

48%

46%

40%

Flat

36%

34%

34%

38%

Av. Flat

£1,422

£1,506

£1,530

£1,504

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TRANSACTIONS

Ltd Company BTL Transactions Limited company vs personal borrowing

Average BTL Loan Amounts

(transacted at Mortgages for Business) The dramatic rise in the popularity of corporate structures began after Income Tax relief changes for landlords were announced in July 2015. The new fiscal rules mean that corporate structures provide many landlords with tax and financial efficiencies when compared to operating on a self-employed basis.

Completed transactions

Individuals Ltd Cos

Completed

Newly Submitted

£203,089

£189,985

£233,246

£186,201

Newly Submitted Applications NUMBER OF CASES

By value, limited company applicants accounted for 52% of all completed buy to let mortgages in Q2 2019.

LTD CO

However, the number of completed transactions by limited companies, was slightly different at just 45% indicating that the average loan was larger for landlords using corporate structures. Indeed, the average loan amount for limited companies was £233,246 compared to £203,089 for those borrowing personally. This will be partly because lenders are permitted to apply less onerous stress tests on loans made to corporate entities.

Newly submitted applications By value, half of all newly submitted buy to let mortgage applications were from limited companies, up from 47% in Q1 2019. The average loan amount for these was £186,201, slightly lower than the personal applications which averaged £189,985. By number, newly submitted applications from limited companies fell for the second quarter in a row, from 55% in Q4 2018, to 52% in Q1 2019, to 49% in Q2 2019. This suggests the initial surge in landlords switching from personal borrowing to limited companies (mainly Special Purpose Vehicles) has levelled off.

46% Newly Submitted Applications VALUE OF CASES

LTD CO INDIVIDUAL

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TRANSACTIONS

Purchases vs Remortgages All transactions At 68% of transactions, remortgaging continues to dominate. In fact, all property types showed an increase in remortgages with the exception of Semi Commercial Properties. However, this data set is much smaller and therefore more prone to fluctuations.

Ltd company transactions For landlords using corporate structures the split is more even, but as we move towards the full roll-out of the new Income Tax regime for landlords (which is being tapered in) we might expect the proportion of remortgages to rise. We will of course monitor the situation.

Please note: Remortgages include “other� lending such as Further Advances, Product Transfers, Equity Release, etc.

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PROPERY TYPES

Property Types Yields Vanilla buy to lets typically provide a reliable if lower yield than other types of properties. As such they accounted for more than 80% of all transactions. They remain a portfolio staple because they are generally easier to finance and manage, appealing to new, part-time and professional landlords. During Q2 the average gross yield increased marginally to 5.8% from 5.7% in the previous quarter. The second most popular property type among landlords were Houses in Multiple Occupation (HMO) which saw yields rise in Q2 2019 to 9.6%, up from 8.9% in the previous quarter. HMOs consistently produce yields above 8% (apart from Q4 2017 when it dipped below to 7.7% tracked since 2011) which accounts for their popularity despite being harder to manage and not quite as easy to finance. Multi-unit Freehold Blocks and Semi Commercial Property also typically return yields higher than vanilla buy to lets; however, they are subject to

greater yield fluctuations because of the wide variety properties within these types. In Q2 2019, MUFB yields bounced back from an alltime low of 5.7% in Q4 2018 to 7.0%. Conversely, SCP yields fell from 10% to 8.7% still a higher average return than produced by vanilla buy to lets and therefore continue to appeal to experienced landlords.

Loan to Value There was little fluctuation in LTVs across all vanilla, HMO and MUFB properties. Loans to value fell back to 51% (from 68%) on semicommercial property probably because the data set was small. SCPs are financed using commercial mortgages rather than buy to let products. The results are included because these properties are of interest to landlords due to their residential element and because they can provide a stepping stone to commercial property investment.

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PROPERTY TYPES

Transactions by property type Vanilla Buy to Let Q3 2018

Q4 2018

Q1 2019

Q2 2019

Purchases

33%

37%

35%

33%

Remortgages

67%

64%

65%

67%

Average loan size

£212,587

£195,924

£189,843

£177,094

Average property value

£313,899

£297,729

£291,455

£271,665

Average loan to value

67%

68%

69%

68%

Average yield

5.4%

5.6%

5.7%

5.8%

Houses in Multiple Occupation (HMO) Q3 2018

Q4 2018

Q1 2019

Q2 2019

Purchases

36%

27%

46%

64%

Remortgages

64%

73%

54%

34%

Average loan size

£237,103

£276,734

£234,887

£249,340

Average property value

£355,576

£393,932

£346,447

£361,936

Average loan to value

70%

70%

70%

69%

Average yield

8.6%

7.7%

8.9%

9.6%

Multi-unit Freehold Blocks (MUFB) Q3 2018

Q4 2018

Q1 2019

Q2 2019

Purchases

32%

37%

25%

17%

Remortgages

68%

63%

75%

83%

Average loan size

£393,308

£616,525

£336,959

£302,230

Average property value

£614,816

£906,778

£492,917

£486,931

Average loan to value

70%

68%

70%

68%

Average yield

8.4%

5.7%

7.1%

7.0%

Semi-commercial Property (SCP) Q3 2018

Q4 2018

Q1 2019

Q2 2019

Purchases

33%

67%

17%

25%

Remortgages

67%

33%

83%

75%

£727,750

£428,167

£306,750

£179,325

£1,270.167

£1,030,000

£443,167

£404,750

Average loan to value

63%

54%

68%

51%

Average yield

7.8%

8.4%

10.0%

8.7%

Average loan size Average property value

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Further Research We publish a variety of papers designed to help landlords, businesses, developers and home-buyers make informed property investment decisions. For more information please visit the News & Insight section of our website.

To discuss both the current and previous results of the Buy to Let Mortgage Index, in the first instance, please contact the Marketing department. Email: marketing@mortgagesforbusiness.co.uk

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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Buy to Let Mortgage Index - Q2 2019