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Q4 2018

Buy to Let Mortgage Index Q4 2018

Buy to let mortgage lending trends Product pricing Effect of underlying cost of funds How fees & charges affect pricing Borrowing by property type 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 previous results of any of the four indices, please visit the news and insight section of our website.

Data & Methodology Lenders and products Data 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 rate and discounted/tracker mortgage products at 65% and 75% loan to value. Lifetime tracker products have also been incorporated into the results for each of the above periods for the discount/ tracker products. 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 discount 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 APR measurement which fails to recognise the effect on borrowing costs of borrowers remortgaging once the period of the discount or fix has expired. If individual mortgage products offered “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.

Multi-Unit Freehold Blocks (MUFB) 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) An HMO is when unrelated tenants have exclusive access to their rooms and share part of the accommodation, such as the kitchen or the bathroom.

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LENDERS & PRODUCT NUMBERS

Lenders & Product Numbers 41 (<>) BTL lenders 22 (<>) BTL lenders with mortgage products for Ltd companies 1,971 (+106) BTL mortgage products 718 (+90) BTL mortgage products available to Ltd companies The number of lenders offering buy to let mortgage products held steady at 41 in Q4. The lender which had launched an anonymous, pilot lending programme in Q3 can now be identified officially - Zephyr Homeloans. Whilst the number of lenders tracked did not change, it was a different story for buy to let mortgage products which increased by 106 to an average of 1,971. Product numbers actually peaked at 2,033 in December, the first time the figure has topped 2,000. This rise reflects both the increasing speciality of marketed products and the competitive nature of the sector. More than half of all lenders now offer products to landlords using limited companies as the borrowing vehicle. In many instances these products are the same ones that are also available to landlords borrowing personally. The average number of products available to limited companies, (mostly Special Purpose Vehicle limited companies), is now 36%, down slightly on the previous quarter because of the overall increase in product numbers.

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 The graph demonstrates a similar trend between the rise in the number of lenders operating in the buy to let mortgage sector compared to the rise in the number of buy to let lenders offering products to landlords using limited companies as borrowing vehicles.

Buy to Let Mortgage Product Numbers The graph demonstrates a similar trend between the growth in products available to landlords borrowing via a limited company compared to the growth in availability of buy to let mortgage products generally.

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RATES & PRICING

Rates & Pricing Preferences

Fixed or tracker rates? 84% of landlords chose a 5 year fixed rate In Q4, 97% of landlords chose a fixed rate â&#x20AC;&#x201C; a small increase (1% point) on the previous quarter. Fixed rate mortgage products are typically based on the current swap rate of the same term, with the addition of the lenderâ&#x20AC;&#x2122;s operating margin. Five year fixed rates were the most popular choice by a huge margin, with an overwhelming 84% of landlords choosing them. Their popularity is likely linked to less stringent stress tests and the promise of a greater degree of stability in the current, uncertain economic climate.

Tracker 2 Year Fixed

From a market perspective, the knock-on effect of the continued preference for longer term fixed rates will be to reduce the volume of buy to let remortgaging in the future. At present it is too early to report on this, but we will continue to monitor.

Fixed Rate Buy to Let Mortgages Term

Q3 2018

Q4 2018

Average 5 year

3.67% (+0.15)

3.58% (-0.09)

Average 3 year

3.30% (=)

3.33% (+0.03)

Average 2 year

3.03% (+0.02)

3.08% (+0.05)

Tracker Rate Buy to Let Mortgages Term

Q3 2018

Q4 2018

Average 5 year

2.80% (+0.08%)

2.83% (+0.03)

Average 3 year

3.51% (+0.04%)

3.57% (+0.06)

Average 2 year

2.98% (+0.05%)

2.98% (=)

Average Term Tracker

4.52% (=)

4.53% (+0.01)

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3 Year Fixed 5 Year Fixed Other

Pricing Overall, product pricing barely moved in Q4 2018. In addition to being the most popular product with landlords, five year fixed rates remained very competitive throughout the quarter and were the only rates to decrease in price slightly, falling from an average of 3.67% to 3.58%.


RATES & PRICING

Pricing trends Overall, product pricing has remained fairly flat since January 2017.

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RATES & PRICING Pricing of products available to limited companies While the number of lenders offering products to limited companies remained the same, actual product availability increased by an average of 90. Overall pricing changed very little.

Products available to Ltd Companies1 Q3 2018 Products

No

Q4 2018

Rate

No

Rate

Variable

133

4.3%

126 (-7)

4.4%

2 year fix

199

3.7%

245 (+46)

3.8%

3 year fix

61

4.2%

70 (+9)

4.2%

5 year fix

235

4.1%

277 (+42)

4.1%

Total (av)

6282

4.1%

7182 (+90)

4.1%

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

Pricing: Ltd Co Products vs All BTL Mortgages

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 Q4 2018 Terms

High LTV

Medium LTV

Low LTV

5 years

3.1% (+0.1%)

2.4% (+0.1%)

1.7% (-0.1%)

3 years

3.0% (=)

2.3% (=)

1.6% (+0.1%)

2 years

2.8% (=)

2.0% (=)

1.4% (+0.1%)

Bank Rate & Swap Rates The good news in Q4 was that Bank Rate was held at 0.75%. Mark Carney, governor of the Bank of England had not ruled out an increase and this continues to be the case with the Monetary Policy Committee considering a gradual rate rise to control inflation post Brexit. The next review is on 7 February 2019. A rise in the Bank Rate will impact mortgage holders who will have to pay more each month on their tracker and variable rate products.

was bucked from November when, despite the normal variations, swaps began to decline. Swap rates are generally considered an indicator for the way interest rates might behave in the future, leading to speculation that rates in general and the Bank Rate will not be increasing in the short term.

Conclusion Brexit continues to have an impact on rates and the housing market. The apprehension of how Brexit will affect the buy to let market has kept interest rates low.

Unlike Bank Rate, up until October 2018 swap rates had been increasing gradually. This trend

Bank Rate, Swaps & 3-Month LIBOR

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FEES & CHARGES

Fees & Charges Amount fees & charges add to the headline Overall, the effect that fees and charges had on the headline rate of buy to let mortgages fell slightly from 0.58% in Q3 to 0.57% in Q4. This was due predominately to low loan to value products (LLTV) where the effect of fees and costs reduced from 0.55% in Q3 to 0.50% in the last quarter. Fees and costs on the medium loan to value (MLTV) and high loan to value (HLTV) products increased by 20bps, to 0.59% for MLTV and 0.67% for HLTV.

Effects of Fees & Charges on BTL Mortgages

Lender arrangement fees There was a shift by lenders towards the use of arrangement fees based on a percentage of the loan amount. Accordingly, the number of products with fee-free options and flat fees declined. Fee-free options fell from 20% to 18%. Products with flat fees fell from 36% to 34%. In Q4, nearly half (48%) of all products had percentage-based fees, up from 44% in the previous quarter. The reason for this shift is likely to be due to the increase in products for limited companies and more complex property types, i.e. specialist buy to let lending. Loan amounts for these options tend to be higher and so lenders are able to claw back some of the margins they have lost through competitive pricing by applying a percentage-based fee rather than a flat fee. Almost always, there is no incentive for lenders to offer products without fees for more complex borrowing scenarios. Having said this, we also found that the average flat fee increased in price to £1,506 – the first time that flat fees have risen above £1,500 since Q1 2016, the quarter in which there was a rush of buy to let applications as landlords raced to complete transactions ahead of the introduction of a stamp duty surcharge on purchases of buy to let property.

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FEES & CHARGES

Lender Arrangement Fees on Buy to Let Mortgage Products in Q4 2018

Lender Arrangement Fees on BTL Mortgages Fee Type

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Fee-free

19%

20%

20%

18%

% based

42%

42%

44%

48%

Flat

39%

38%

36%

34%

Av. Flat

£1,441

£1,389

£1,422

£1,506

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TRANSACTIONS

Ltd Company BTL Transactions Limited company vs personal borrowing Average BTL Loan Amounts

(transacted at Mortgages for Business) The popularity of using corporate structures such as Special Purpose Vehicle (SPV) limited companies continues to rise following changes in income tax relief for landlords which were announced back in July 2015.

Individuals Ltd Cos

Completed Applications

Newly Submitted Applications

£202,652

£252,324

£227,645

£241,653

Completed transactions By value, limited companies accounted for 49% of completions, up from 43% in the previous quarter. This growth was spread over a smaller number of cases (35% in Q4 compared to 44% in Q3) demonstrating that landlords borrowed more per transaction using corporate vehicles than borrowing personally (individuals).

Newly Submitted Applications NUMBER OF CASES

LTD CO

INDIVIDUAL

For landlords using limited companies, the average completed loan was £227,645 compared to £202,652 for landlords borrowing in a personal capacity.

Newly submitted applications By value, limited company applications accounted for 51% of all applications, up from 39% in Q3— similar to the pattern seen in completions. By case count however, the story was different. There was an increase in landlords using limited companies, from 44% in Q3 to 55% indicating a shift away from personal borrowing. The average value of a limited company application was £241,653, compared to £252,324 for landlords borrowing personally.

46%

Newly Submitted Applications VALUE OF CASES

LTD CO INDIVIDUAL

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TRANSACTIONS

Purchases versus Remortgages All transactions Overall, the predominance of remortgaging continued in Q4 accounting for 65% of all transactions. Whilst in Q3, there was a quarter-onquarter increase (from 32% to 36%) in purchase applications for HMO property, this activity reversed in Q4 with only 27% of transactions accounting for purchases of HMOs. The unusual increase seen in Q3 may have been due to landlords racing to complete purchases of HMOs ahead of new legislation on minimum room sizes and the extension of the mandatory licensing scheme to smaller HMO property.

Ltd company transactions When we look at transactions for limited companies, a different picture emerges. When it first became clear that using corporate structures as borrowing vehicles could be more tax efficient than borrowing personally, purchases outstripped remortgages as landlords began using these vehicles for new acquisitions. Then, two to three years later, as the finance for those purchases began to roll off the initial mortgage rate, the proportion of purchase transactions began to decline until Q3 2018 when the split between purchases and remortgage levelled out. In Q4 2018 the proportion of purchases started to grow again, accounting for 56% of limited company buy to let transactions. It is not yet known why.

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PROPERY TYPES

Property Types Yields

Loan to Value

Vanilla properties continue to provide the most consistent yields of all property types, averaging 5.6% in Q4 2018, an increase on 5.4% in the previous quarter. When looked at annually, however, yields from these properties are in slight decline although they remain popular with property investors because they are relatively easy to finance and manage, and are seen as less risky assets than more complex types of buy to let property. Quarter-on-quarter, yields on HMO reduced by nearly 1% point; however, when looked at annually they produced the highest yield at an average of 8.6%.

LTVs remained relatively steady across all types of property. The average loan to value across the whole year (2018) for vanilla, HMO and multi-unit property combined was 67%. These properties are mostly financed with buy to let mortgage products. Semi-commercial properties do not qualify for buy to let mortgage products and so have to be financed with commercial mortgages. The average loan to value for these properties for the year was 55% which is much more in line with LTVS on commercial properties generally.

Multi-unit yields fell in Q4 due to an increase in the value/price of the properties in the data set but still performed better than vanilla properties (just!).

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PROPERTY TYPES

Transactions by property type Vanilla Buy to Let Q1 2018

Q2 2018

Q3 2018

Q4 2018

Purchases

39%

35%

33%

37%

Remortgages

61%

65%

67%

64%

Average loan size

£178,735

£195,789

£212,587

£195,924

Average property value

£282,492

£308,236

£313,899

£297,729

Average loan to value

66%

67%

67%

68%

Average yield

5.6%

5.5%

5.4%

5.6%

Houses in Multiple Occupation (HMO) Q1 2018

Q2 2018

Q3 2018

Q4 2018

Purchases

40%

32%

36%

27%

Remortgages

60%

68%

64%

73%

Average loan size

£233,957

£261,719

£237,103

£276,734

Average property value

£353,989

£397,446

£355,576

£393,932

Average loan to value

71%

69%

70%

70%

Average yield

9.5%

8.6%

8.6%

7.7%

Multi-unit Freehold Blocks (MUFB) Q1 2018

Q2 2018

Q3 2018

Q4 2018

Purchases

25%

38%

32%

37%

Remortgages

75%

62%

68%

63%

Average loan size

£328,868

£510,677

£393,308

£616,525

Average property value

£503,326

£761,710

£614,816

£906,778

Average loan to value

65%

68%

70%

68%

Average yield

8.1%

7.5%

8.4%

5.7%

Semi-commercial Property (SCP) Q1 2018

Q2 2018

Q3 2018

Q4 2018

0%

33%

33%

67%

100%

67%

67%

33%

£950,000

£400,000

£727,750

£428,167

£2,000,000

£736,667

£1,270.167

£1,030,000

Average loan to value

48%

56%

63%

54%

Average yield

8.9%

7.8%

7.8%

8.4%

Purchases Remortgages Average loan size Average property value

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Further Research We publish a variety of papers designed to help landlords, businesses 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:

Jenny Barrett, Marketing & Research Director Tel: 01732 471615 Email: jennyb@mortgagesforbusiness.co.uk Website: www.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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