Last week’s Listening to Intermediaries 2007 survey from financial services research firm BDRC has depicted an increasingly fragmented and nervous mortgage market. But how accurate is the picture painted?
The survey of brokers, commissioned by a number of high-profile lenders including GMAC-RFC and Edeus, highlighted that a number of clients are taking out interest-only buy-to-let mortgages, based solely on capital growth. With all their eggs in one basket, what will the effect be if – or should that be when – there is a downturn?
In contrast, the report also claims that a number of serious buy-to-let investors are partially selling up and moving their money into other asset classes. One broker surveyed said: “The big ones have seen that the yields are just ridiculously low and prices are nice and high – they are moving into other areas – if it was me, I would not bother going into it any more.”
This does not ring true for Andy Pratt, chief operating officer at Alexander Hall. He says: “I am surprised. The portfolio landlords that we deal with are looking to add more properties if anything. Obviously, if they did sell up, it would free more properties up for first-time buyers.”
However, he has seen the growth in interest-only. He says: “There has been a trend towards it, especially for people just starting out, as it is seen as a lower cost initially. And in some cases, it does make sense. In terms of a downturn, it is a question of degree. It will have to drop a significant amount before people start really suffering.”
It is a similar story for David Sheppard, sales director at Principia. He said: “For tax reasons, interest-only for buy-to-let mortgages is the way it should be. If someone gets proper advice, then in most cases they should be looking at doing interest-only.”
He continues: “I am seeing fewer new people coming into buy to let. It is more the people who have already made the money and have the equity there. All the time that property prices continue to increase, as they are currently, these landlords are not going to sell up. It would take three or four months of continuous downturn for that to happen.”
Tom Cleary, director at Mortgage Find, says he is astonished it has taken this long for research to expose the fact that the majority of buy to let is interest-only. He says: “I have never known it any other way. The rental yields have fallen by such a large extent as prices have increased. Because the investors have to borrow so much more to afford the properties, most buy to let on repayment models just do not stack up unless the clients are putting in a massive deposit.
Cleary adds that he has heard various people talk of landlords selling up and investing elsewhere, but he has not come across this. He states: “If they are investing somewhere else, where would they get the sort of returns that property has given them? They will not get it from shares. I have certainly not seen them selling up myself, as most of our landlords are looking to expand their portfolios.”
This nervous approach appears to have spread to self-certification as well. The intermediaries surveyed by BDRC said that they were dubious about high loan-to-values (LTVs), avoiding anything over 90%, with the view that self-certification was actually prohibitive and not in the client’s interest. One respondent said that he feared that self-certification ‘will come back to bite us’. Interestingly, fast-track was said to be more popular than self-certification, as the compliance onus was transferred to the lender.
Kevin Paterson, sales director at Park Row, is not a fan of self-certification. He says: “It is a relatively recent phenomenon, this increased nervousness, and it is due to the high profile exposure of self-certification, particularly on television programmes like Tonight with Trevor McDonald. It is no secret that the notion of self-certification is under the microscope. The biggest area for me is employed self-certification – there is simply no justification for it, no matter what anyone else says.
Finding the solution
Fast-track is not the answer either for Paterson. He says: “Most firms have got wise to self-certification. If they have not banned it they have made it difficult to get through. Fast-track is just lottery-based pseudo-self-certification. A lot of the brokers that use it will put cases through in the hope that they are not picked up, as the majority are not checked. I have certainly seen evidence of it being abused. It is a can of worms and very easy to abuse.”
Sheppard says that for those that genuinely cannot prove their income, or have various sources of income, self-certification is justified. However, he adds: “From our perspective, self-certification only accounts for 6-7% of the business we do. We try to find a solution where we can prove the income. Those that specialise in self-certification, or seek that market, should be concerned. If you dedicate a large proportion of your written business towards it, the FSA is more likely to have a look at you. You need a healthy split, with all other avenues explored first.”
For Pratt, the LTV is irrelevant. He says: “The fact that it is a high LTV does not matter, as long as it is a deserving case. The same standards apply, whether the LTV is high or low.”
At least in buy to let, it would appear that the predictions of doom and gloom from the survey are a touch premature – established landlords continue to flourish, with plans to expand rather than downsize. However, there seems to be a definite unease over self-certification and its various tenets. As long as it is subjected to the public spotlight, that is likely to continue. n