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Q1 2019

Buy to Let Mortgage Index Q1 2019

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 1


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 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 (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 Explained 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. applications and/or completions.

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 flats 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 bed 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.

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LENDERS & PRODUCT NUMBERS

Lenders & Product Numbers 39 (-2) Total BTL lenders 20 (-2) BTL lenders with mortgage products for Ltd companies 1,924 (-47) Total BTL mortgage products 567 (-151) BTL mortgage products available to Ltd companies The number of lenders offering buy to let mortgage products declined in the last quarter as two of the tracked lenders withdrew from the market (Fleet Mortgages* and Magellan Homeloans). These withdrawals did not have a huge impact on the overall number of buy to let mortgage products, which only reduced by an average of 47 as other lenders increased their ranges. However, many of the new offerings did not include products for landlords borrowing via corporate structures and hence there was a large drop in availability of products for limited companies. *Fleet Mortgages subsequently re-entered the market in Q2 2019

BTL Mortgage Lenders

BTL Mortgage Products

43% 75%

Lenders offering products to Ltd Co borrowers

Products available to Ltd Co borrowers

Lenders offering products to individuals only

Products available to individuals only

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LENDERS & PRODUCT NUMBERS

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

Buy to Let Mortgage Product Numbers The graph below demonstrates a similar trend in the number of products available to landlords borrowing via a limited company compared to the growth in availability of buy to let mortgage products generally. Overall there has been steady growth since 2015, with a recent decline between Q4 2018 and Q1 2019.

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RATES & PRICING

Rates & Pricing Fixed or tracker rates?

Rate Preferences

2 year fixed rates increasingly popular Fixed rates remained the most popular type of product in Q1 with 98% of landlords preferring them to variable rates, (up from 97% the previous quarter). However, the proportion of those taking five year fixes fell (from 84% in Q4 to 71% in Q1), with more landlords choosing two year fixed rates (18% in Q1, up from just 8% in Q4). It is likely that there are two main reasons for this move towards shorter term fixes: 1. An increase in landlords switching to products offered by the same lender because the mortgage had been arranged prior to the introduction of stricter stress test parameters by the Prudential Regulation Authority (PRA) in January 2017. Product transfers, as they are known, offer landlords a route to refinancing on a like-for-like basis even where they may fail under the new PRA guidelines on new borrowing. 2. Speculation that the Bank Rate would rise has declined amid ongoing Brexit negotiations, resulting in landlords feeling more confident in taking two year fixed rates which are cheaper than their five year counterparts.

Tracker 2 Year Fixed 3 Year Fixed 4 Year Fixed 5 Year Fixed

Product growth since new PRA guidelines Exponential rise in 5 year fixed rate products Despite the small dip, five year fixed rate products remain the most popular choice amongst landlords. In fact, since the introduction of stricter stress tests, the rise in the numbers of these products has been quite extraordinary, up a staggering 138% since January 2017. The reason for this leap can probably be attributed to the fact that landlords can borrow more using these products, although there is no doubt that concerns regarding a rise in the base rate also played its part. Three year fixed and variable rates have faired less well over the same period, both declining in numbers and popularity. Variable rates are likely to have declined because their fixed rate counterparts pricing has been so competitive, landlords haven’t had to risk opting for trackers in order to help with cash flow. Three year fixed rates have simply not been priced competitively enough compared to two and five year fixed rates.

Product

January 2017

March 2019

% change

2 yr fixed

339

689

103%

3 yr fixed

161

157

-2%

5 yr fixed

302

718

138%

Variable

344

279

-19%

1,146

1,843

61%

Total

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RATES & PRICING

Pricing Overall, product pricing has remained fairly flat since January 2017. The average price of a buy to let mortgage in Q1 2019 was 3.4%, very slightly less than in the previous quarter. The only products to have moved considerably in price were term trackers which fell by 0.4% points.

Average Fixed Rate Buy to Let Mortgage Prices Term

Q4 2018

Q1 2019

Average Tracker Rate Buy to Let Mortgage Prices Term

Q4 2018

Q1 2019

5 year

2.83% (+0.03%)

3.03% (+0.20)

3 year

3.57% (+0.06%)

3.51% (-0.06)

5 year

3.58% (-0.09)

3.58% (=)

3 year

3.33% (+0.03)

3.04% (-0.29)

2 year

2.98% (=)

3.04% (+0.06)

2 year

3.08% (+0.05)

3.14% (+0.06)

Term

4.53% (+0.01)

4.13% (-0.40)

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RATES & PRICING

Pricing of products available to limited companies Good news for corporate borrowers as product prices fall

Products available to Ltd Companies1 Q4 2018

Q1 2019

Products

No

Rate

No

Rate

Variable

126

4.4%

79 (-47)

4.0%

2 year fix

245

3.8%

219 (-26)

3.6%

3 year fix

70

4.2%

28 (-42)

3.6%

5 year fix

277

4.1%

237 (-40)

4.1%

Total (av)

7182

4.1%

5632 (-155)

3.8%

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

Rates available to landlords using limited companies are generally higher than the market average 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). In Q1 2019, the average price of a buy to let mortgage available to landlords using a limited company was 3.8%, down from 4.1% in the previous quarter. This is great news for landlords using corporate structures and confirms that the gap in rate pricing between personal and limited companies is declining (3.0% vs 3.8%) as more lenders start to cater for companies and others adjust their rates to meet the growing demand.

Average Prices All BTL mortgages:

3.0% BTL mortgages available to Ltd companies:

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UNDERLYING COSTS

Underlying Costs BTL Fixed Rate Margins Over Swaps Q1 2019 Terms

High LTV

Medium LTV

Low LTV

5 years

3.1% (=)

2.4% (=)

1.7% (=)

3 years

2.9% (-0.1%)

2.1% (-0.2%)

1.5% (-0.1%)

2 years

2.9% (+0.1%)

2.1% (+0.1%)

1.5% (+0.1%)

Swap Rates Usually a fall in swap rates is followed by a fall in fixed rate buy to let mortgage pricing but in Q1 2019 this is not strictly the case. The reduction in buy to let interest rates can be linked to competitive pressures within the market with a number of lenders not only reducing rates but also offering incentives such as free valuations and reduced fees. The temporary loss of a specialist lender (Fleet Mortgages) in the first quarter will have contributed to the fall in the average fixed rate pricing, as this lender’s rates were generally higher than providers with more mainstream offerings.

The uncertainty surrounding Brexit will also have played its part, but who knows what logic is behind its influence?! The good news is that the drop in swap rates is generally seen as a forward indicator of a drop in fixed buy to let rates.

Bank Rate The unpredictability and politics surrounding Brexit continue to have an affect on the base rate and the general market consensus is that the Monetary Policy Committee is unlikely to vote for a rise in the near future.

Bank Rate, Swaps & 3-Month LIBOR

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FEES & CHARGES

Fees & Charges Amount fees & charges add to the headline Lenders reduce their margins On average, fees and charges added just 0.55% to the headline rate of a buy to let mortgage in Q1 2019, down from 0.57% in Q4 2018, suggesting that lenders are squeezing their margins to remain competitive. As in Q2 2018, this is the joint-lowest margin we have seen since 2013 when Mortgages for Business started tracking the effect of fees and charges. The largest falls in fees and charges were for medium and high loan to value rates, both of which saw a reduction of 3 basis points to 0.56% and 0.64% respectively.

Effects of Fees & Charges on BTL Mortgages

Lender arrangement fees More fee-free products but higher flat fees too Whilst percentage-based arrangement fees are still favoured by the majority of lenders (46%), competition in the market saw an increase in the number of fee-free products from 18% in Q4 2018 to 20% in Q1 2019, which will be good news to landlords who prefer to keep upfront charges to a minimum - see pie chart on page 11. The proportion of flat fee products remained the same at 34%; however, for the third quarter in a row there was an increase in the average cost of these flat fees, and for the second consecutive quarter that fee has topped ÂŁ1,500. The last time the average flat fee rose past this point was back in Q1 2016 when it averaged ÂŁ1,556.

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FEES & CHARGES

Proportion of Lender Arrangement Fee Options Charged on Buy to Let Mortgage Products in Q1 2019

Lender Arrangement Fees on BTL Mortgages Fee Type

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Fee-free

20%

20%

18%

20%

% based

42%

44%

48%

46%

Flat fee

38%

36%

34%

34%

Av. flat fee

£1,389

£1,422

£1,506

£1,530

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TRANSACTIONS

Ltd Company BTL Transactions Limited company vs personal borrowing Roughly half and half Following changes to the way in which income tax for landlords is calculated, corporate structures - mainly Special Purpose Vehicle limited companies - have become as popular as borrowing personally.

Q1 2019 Average BTL Loan Amounts Completed Applications Individuals

Completed transactions In the first quarter of 2019, nearly half (49%) of all completed buy to let mortgage applications were from landlords using limited companies. This is up from 46% in Q4 2018. However, the average value of these completions has fallen quarter-on-quarter by 19% from £227,645 to £183,601. As loans to values generally have remained constant it can be surmised that landlords were financing less expensive property. The value of completions for landlords borrowing personally rose by 18% from £202,652 to £238,294.

Ltd Cos

Newly Submitted Applications

£238,294

£225,232

£183,601

£184,495

Newly Submitted Applications NUMBER OF CASES

LTD CO INDIVIDUAL

46%

Newly submitted applications In contrast to completions, the number of new buy to let mortgage applications made by landlords using limited companies decreased slightly from 55% to 52%. It could be that case numbers have now plateaued - we will monitor this closely.

Newly Submitted Applications VALUE OF CASES

By value, new applications made by limited companies accounted for 47% of all applications, a slight decrease on the previous quarter (51%). The average value of a limited company application was £184,495, compared to £225,232 for landlords borrowing personally.

LTD CO IN-

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TRANSACTIONS

Purchases vs Remortgages All transactions Overall remortgages continued to dominate buy to let financing and accounted for 65% of all transactions. HMOs were the only properties to show a growth in the percentage of purchase transactions, increasing from 27% in Q4 to 46% in Q1 2019, indicating landlords’ preference for assets with consistently higher yields.

Ltd company transactions When looking at purchase and remortgage transactions by landlords using limited companies, the picture was slightly different, showing a more even split between the two. Previously, the split had been in favour of purchase transactions due to the rise in landlords who had only just started using companies as borrowing vehicles, in light of the income tax relief changes which were announced in July 2015. Three years down the line, many of the mortgages on these properties have now come to the end of their initial fixed rate period which has led to an increase in remortgage activity. Going forward, it will be interesting to see if transactions in a limited company follow the same pattern as landlords financing property personally, i.e. will remortgaging start to outstrip purchases? Only time will tell but the answer might provide a good indication of the state of the buy to let mortgage market and we will be monitoring the situation closely.

Remortgage transactions include other lending such as further advances, product transfers and equity release.

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PROPERY TYPES

Property Types Yields Ever-popular because of their consistent performance and relative ease to finance, yields from vanilla properties have remained stable at between 5-6% since 2015. HMOs continue to produce the highest yields despite hitting a low of 7.7% in the last quarter of 2018. This could be due to landlord inertia in the run-up to the Christmas holidays and a waitand-see approach regarding Brexit. In Q1 2019 yields bounced back to 8.9% despite no resolution to Brexit. Also bouncing back since returning an all-time low yield of just 5.7% in Q4 2018 were multiunits which produced an average yield of 7.1%.

cannot be financed with a buy to let mortgage because of the commercial element. They are included in the index because of their dual purpose and because they are popular with more experienced landlords and those looking to move into commercial property investment.

Loans to Values There has been little change in the LTVs across all types of property except SCPs which is due to a smaller data set. Loans to values for vanilla, HMOs and MUFBs have remained relatively constant between 69% and 70% for the past year.

Yields from semi-commercial properties (SCP) fluctuate more widely because of the smaller dataset although they typically perform better than vanilla properties. In Q1 2019 they produced the highest yield of any buy to let property type(10%). It should be noted that SCPs

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PROPERTY TYPES

Transactions by property type Vanilla Buy to Let Q2 2018

Q3 2018

Q4 2018

Q1 2019

Purchases

35%

33%

37%

35%

Remortgages

65%

67%

64%

65%

Average loan size

£195,789

£212,587

£195,924

£189,843

Average property value

£308,236

£313,899

£297,729

£291,455

Average loan to value

67%

67%

68%

69%

Average yield

5.5%

5.4%

5.6%

5.7%

Houses in Multiple Occupation (HMO) Q2 2018

Q3 2018

Q4 2018

Q1 2019

Purchases

32%

36%

27%

46%

Remortgages

68%

64%

73%

54%

Average loan size

£261,719

£237,103

£276,734

£234,887

Average property value

£397,446

£355,576

£393,932

£346,447

Average loan to value

69%

70%

70%

70%

Average yield

8.6%

8.6%

7.7%

8.9%

Multi-unit Freehold Blocks (MUFB) Q2 2018

Q3 2018

Q4 2018

Q1 2019

Purchases

38%

32%

37%

25%

Remortgages

62%

68%

63%

75%

Average loan size

£510,677

£393,308

£616,525

£336,959

Average property value

£761,710

£614,816

£906,778

£492,917

Average loan to value

68%

70%

68%

70%

Average yield

7.5%

8.4%

5.7%

7.1%

Semi-commercial Property (SCP) Q2 2018

Q3 2018

Q4 2018

Q1 2019

Purchases

33%

33%

67%

17%

Remortgages

67%

67%

33%

83%

Average loan size

£400,000

£727,750

£428,167

£306,750

Average property value

£736,667

£1,270.167

£1,030,000

£443,167

Average loan to value

56%

63%

54%

68%

Average yield

7.8%

7.8%

8.4%

10.0%

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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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Profile for mortgagesforbusiness

Buy to Let Mortgage Index - Q1 2019  

Here at Mortgages for Business we track and analyse developments in the buy to let mortgage market to help landlords and property investors...

Buy to Let Mortgage Index - Q1 2019  

Here at Mortgages for Business we track and analyse developments in the buy to let mortgage market to help landlords and property investors...