• Lending Criteria to be relaxed ?

    John Phillips is the financial services director at Kinleigh Folkard & Hayward and in a recent article for Mortgage Introducer he makes an interesting point about lending criteria.

    There are plenty of positive headlines in the news about the return of growth to the UK economy and even enough good house price data to spark talk of a bubble and imminent correction.

    At the front-line it is fair to say that we are seeing greater levels of confidence, with all measures pointing in the right direction.

    The missing piece however is any significant improvement in household real incomes.

    You can read the full article here
    Although he obviously does not give specifics or timescales John does make a valid point that with the current cap on incomes it is hard to see how the property market can continue its current revival without lending criteria changing a little.

    House Price Rises

    Meanwhile RICS has reported that over half of its members reported price rises during October, the highest level since June 2002, Read more:

    This adds to a wide range of predictions of price rises for the next twelve months, and the associated good & bad consequences. The government’s Help to Buy scheme is adding to the mix with pretty much all of the mainstream lenders now offering access.  For mortgage brokers the increased activity can only be good news, but is it a short-term benefit?

    Quite how the government will keep a lid on the property market remains to be seen. There is a natural (Conservative) tendency to trust that “market forces” will apply any necessary corrections.  However, with the level of regulatory and treasury intervention already taking place in the housing market there is no real “market force” to content with. It is all artificially contrived.

    Is lending criteria about to be changed

    And as if to prove the point, the Bank of England has pretty much confirmed that they do not see market control as their responsibility.  This comment was in response to the Royal Institution of Chartered Surveyors’ suggestion last month that the Bank should step in to control house price inflation by capping it at 5%. It would appear that the Bank of England are content to see house prices rise as mortgages become more widely available. The bank’s main tool to combat price inflation is to control interest rates, but with the current constraint on incomes any upwards hike in rates could be very problematic for existing borrowers.

    The banks acknowledge that there is a wider problem with the general population’s finances as a recent HSBC press release highlights a savings issue:

    800,000 more households on the brink than in 2012 34% of the UK population have savings of £250 or less. New research from HSBC has found that over a third of people in the UK – around 8.8 million households – only have £250 or less set aside as a financial safety net.

    Of course the 34% of households mentioned in the research may not be the same households that are applying for mortgages. Nevertheless it should be of concern that the general public appear to be walking into government underwritten home loans with very little by way of a safety net.

  • EU Directive on Buy to Let Mortgages

    The EU Directive on Buy to Let Mortgages was quite big news last week.  A quick round up of the reaction to the news follows, but first a bit of background:

    What is the EU Directive on Buy to Let Mortgages

    EU Directive on Buy to Let Mortgages
    EU Directive on Buy to Let Mortgages was set to change the UK market

    The European Union has been considering a set of new rules governing the supply of consumer credit, and in particular mortgages.  As part of the consultation process the EU sent out proposals to all member states, which if adopted as-is would have seen major changes to how Buy to Let mortgages are regulated.

    In essence the proposals would have required lenders to assess affordability of each individual loan without taking into account the rental income from that property.  Clearly this got a lot of people quite excited.

    It is worth bearing in mind that these were only proposals, and as such were intended to spark discussion.  It is also worth pointing out that the UK property market is unlike the rest of the EU.  The concept of private individuals owning multiple properties and renting them out is nowhere as common in most of Europe as it is in the UK.  So not entirely surprising that they would have based as set of proposals around the typical european set up.

    The Reaction:

    So, here’s a quick round up of the some of reaction to the news.

    The NLA took some credit for the change:


    NLA saves buy to let mortgages from being outlawed by European Union directive

    The Mortgage Directive, officially known as the Credit Agreements Related to Residential Property Directive (CARRP) attempted to create a single regulatory framework which would govern all mortgages within the European Union. The EU lobbied hard for this directive so that EU citizens would understand the regularity regimes when purchasing properties in different member states.

    The NLA has worked extensively with several European Parliaments and through pan-European associations such as the International Union of Property Owners (UIPI) and other UK and EU trade bodies to secure a complete exemption for buy to let mortgages from the directive.

    The online magazine Introducer Today basically quoted NLA reaction:

    BTL narrowly survives “catastrophic” EU Directive 

    A new EU Directive that would have made buy-to-let mortgages illegal has been successfully averted down after industry lobbying.

    Mortgage Introducer also relied heavily on the NLA press release:

    NLA welcomes EU decision on buy-to-let – Buy-to-let – Mortgage Introducer UK

    The mortgage directive, officially known as the Credit Agreements Related to Residential Property Directive, attempted to create a single regulatory framework which would govern all mortgages within the European Union.

    The final text is now going through the trialogue process which involves all 27 heads of state and the European parliament who will analyse the new revised before voting on the new directive to sign it off.

    The story was also covered extensively in the mainstream press:

    UK landlords secure reprieve after early draft of EU mortgage rules threatened to ban buy-to-let completely

    Early drafts of new mortgage rules currently being approved by the European Union would have banned buy-to-let loans completely and were only reversed after lobbying by UK landlords.The National Landlords Association said the original draft of the EU mortgage directive, which aims to create a single regulatory framework to govern all mortgages within the EU, would have halted the current booming buy-to-let market.It says that in constructing the directive, the EU Commission didn’t take into account the nuances of unusual mortgage products such as buy-to-let that only exist in Britain and Ireland.

    To be fair to the EU, these were proposals intended to protect consumers.  Given the track record of the financial industry generally, and mortgage availability over the last decade or so, it does not seem unreasonable.  Contrary to some of the reporting, the proposals were not intended to “ban” buy to let lending.  No doubt that had the proposals gone unchanged it would have been a major problem for people operating under the current market setup, but this would have been an unintended consequence.  Not the intention.

    Surely this is how drafting proposals and inviting response is meant to work.  An example to governments about listening to feedback ?

  • Help to Buy

    Affordable housing continues to generate plenty of discussion among property professionals, both in the context of the supply of funding, and as a stimulus for house building. The Help to Buy scheme has divided opinion.

    What Is Help To Buy?

    1. Equity Loan
    2. Mortgage Guarantee

    The Help To Buy Equity Loan

    Underwriting the mortgage is still done by the lender in accordance with their existing lending policy. Unfortunately even though overall risk exposure is lower, many people feel that lenders are not acting fairly when assessing that risk. The accusation goes along the lines that a first time buyer on the Help to Buy scheme is effectively asking a lender to advance 75% of the purchase price (or more accurately 75% of the perceived value). However the underwriting process is not reducing the risk loading to the same extent that a person not on the scheme, with a 25% deposit, might enjoy.

    In fairness that is probably not a completely balanced way of making a comparison, as the Help to Buy scheme is specifically aimed at helping first time buyers. Underwriters may perceive that a first time buyer on the Help to Buy scheme is a higher risk purely by virtue of being in need of the scheme’s help.

    Mortgage Guarantee under Help To Buy

    The government is investing £130 billion in the mortgage guarantee scheme which will be available to anyone buying a home (new build or old) from January 2014. There is a limit of £600,000 which is the same cap as the equity loan.

    It is hoped that the combination of both schemes will help “Generation Rent” access affordable mortgages with lower deposits.

    There is of course a danger that increased availability of mortgages, and therefore buyers will start to push up prices at the entry level. That will naturally translate further up the chain and the property market starts to gather some fluidity.

    Most discussion about Help To Buy focuses on the effect that the scheme will have on the property market. Clearly the are some competing vested interests at play here. It will be ironic if the Help To Buy scheme ends up pushing up house prices, thereby excluding the very people it was set up to help.

    There is more about the Help to Buy scheme on the Gov.uk portal.

  • Are Interest Only Mortgages Making a Comeback?

    Many homeowners feel trapped on relatively expensive mortgages, the combination of the ongoing lack of availability of mortgages and stagnant house prices.  Lenders left the interest only market in droves following indications from regulators that increased regulation was likely.

    According to Moneyfacts the number of lenders offering interest only mortgages reduced to just 12, which is down from 81 two years ago.  Brokers are hoping that as the regulatory regime becomes clearer lenders will start to return to the market.

    Repayment plans and Interest Only Mortgages

    It certainly could be argued that the explosion of interest only mortgages 5 to 10 years ago was either a cause or symptom of the wider problem with credit availability.  It was all too easy for someone to self declare their income and then borrow 85% Loan to Value (LTV) with no plan to repay the mortgage.  Other than maybe selling the property before the term expired.  A fine plan, until the LTV gets bent out of shape.

    interest only mortgagesThe Financial Conduct Authority (FCA) conducted a review of the interest only mortgage market recently and found that 90% of borrowers had a “plan” to repay their loan.  There is no way of knowing from the survey whether the respondents plan is an effective one.

    Anyone looking for an Interest Only deal now must be in no doubt at all that they will need a credible plan to repay the loan.  Even high net worth individuals with a proven track record in property are being asked to provide reliable proof that they are in good shape.

    Providing proof of a repayment vehicle is not as straight forward as once it was either.  Forget relying on an inheritance or bonus.  Shares may be acceptable, but lenders are likely to adopt a very modest growth projection.  Seems that pensions are acceptable providing that a borrowers can show that they are able to take a suitable lump sum.

    Clearly Interest Only deals will remain outside the reach of most borrowers.

    Current Availability

    A quick check of http://www.money.co.uk shows 12 different lenders offering Interest Only mortgages (excluding buy to let) with LTV’s from 60% to 95%.  The mainstream lenders are still offering interest only deals, for example HSBC are currently offering a 2 year fixed deal at 1.68%, against a maximum LTV of 60%.  Or 4.39% fixed for 2 years against 90% LTV.  Virgin Money are also offering similar deals.

    Whilst interest rates remain low

  • Maximum Loan to Value For Interest Only Mortgages Start to Tumble

    The Nationwide Building Society is among a growing number of lenders slashing its interest-only maximum loan to value for residential lending.  In March the mainstream lender reduced its maximum LTV for interest only loans from 75% to 50%.

    Martyn Dyson, head of mortgages at Nationwide, says:

    “A number of major lenders have recently restricted their criteria for interest-only mortgages and Nationwide needs to be able to manage application levels in a prudent and sustainable manner.

    Many industry commentators are predicting that this is further evidence that Interest Only products will be withdrawn completely from mainstream lending.

    Coventry Building Society Also Reduces Maximum Loan to Values

    Quickly after the Nationwide announcement the Coventry Building Society followed suit by cutting its maximum LTV for interest-only lending from 75% to 50%.

    The Coventry stated:

    “Following moves by a number of other lenders to restrict their criteria for interest-only lending the Coventry has also reduced the maximum LTV to 50% where any aspect of the loan is interest-only.

    And Then Skipton Building Society Followed Suit

    Skipton BS then announced that from march 27th they would be cutting their max LTV on Interest Only mortgages to 60%.  They say that for applications up to 80% LTV, a maximum of 60% LTV can be taken on interest-only but the remaining 20% must be taken on capital and interest basis.

    At the same time the Skipton also withdrew their 95% LTV products. Skipton states:

    “Since the start of this year we have seen quite an uptake of applications for 95 per cent LTV loans, so as a result what we have set aside for them has been over subscribed and we have decided to pull out of them for the time being.”

    Leeds Building Society Also Reduces Maximum LTV for Interest Only Loans

    Leeds Building Society has cut its maximum loan-to-value for interest-only lending from 75% to 50%.  The building society cut its maximum LTV for interest-only loans where the repayment strategy is the sale of the property from 70% to 50%.

    And Finally, Santander

    Santander has cut its maximum loan-to-value for interest-only lending from 75 per cent to 50 per cent and tightened its interest-only criteria.  They will no longer accept the sale of a second property or cash savings as repayment vehicles.

  • Property Developers Report Increased Profits

    Property developer, Bovis Homes Group have shared some good news in their preliminary results for the year ending 31st December 2011. They report an operating profit of £36m for 2011, an increase of 69% on the previous year.

    The background makes quite positive reading too. There were 2045 completed home sales, an increase of 8%. The average sale price was £180,100 which is up by 5% on 2010. Bovis has also increased its land bank as it now holds 18.749 plots with outline or potential planing consent against 17,325 in 2010.

    David Ritchie, chief executive of Bovis Homes Group, says:

    As well as driving profitability, the Group is focused on enhancing shareholder returns through improving the efficiency of its capital employed, through land bank management, including the sale of consented plots on selected sites, and by managing working capital tightly.

    2012 is looking better too, private reservations have apparently increased and are reported to be ahead of expectations.

    Taylor Wimpey

    One of Britain’s largest volume new home builders have announced increased profits, and resumed dividend payments for the first time since the property crash.

    Gross profits were up by 25% to £287m, boosted by the sale of written down land which achieved a better value than expected.

    The average selling price for a Taylor Wimpey home was £185,000 which is just £1,000 up on the previous year. They were the first to point out that the increased profits were more to do with efficiency savings rather than a marked improvement in the general housing market.

    Persimmon Returns 1.9bn To Investors

    Persimmon has announced that it is returning the cash at the same time as reporting full-year results showing pre-tax profits fell to £147m from £154m in 2010. Revenue for the year was £1.54bn down slightly on the previous year’s £1.57bn

    Persimmon reported that they completed 5,643 home sales in 2011, which was nearly 3% lower than the prior year. Although they said that the second half improved with sales 7.7% higher than the previous six months.

    The average selling price was £167,580, down 2.8pc on the previous year, which Persimmon blamed on smaller houses making up a bigger share of its sales.