ARLA’s problem was that in the wake of the recession of the early 1990s, there had been a surge in demand for rented properties and there wasn’t the supply to meet the level of demand.
What it proposed was a lending scheme aimed at landlords, tailored to the rented property market – no such thing existed at the time.
Over a number of months, we developed the thinking further that culminated in the launch of buy to let in 1996.
The products
The maximum loan-to-value was 75%, loans were priced on a Libor-linked basis at 2% over Libor and the rental income had to equate to 150% of the mortgage payment. Though rudimentary, the basic building blocks of buy-to-let lending have not radically changed since. Other lenders joined the discussion and eventually there were four in the initial launch.
Landlords had very few options back then and buy to let quickly gained ground. Other lenders were slow to respond, so the ARLA panel had the market pretty much to themselves in the early days.
Indeed, many lenders that today have become major players in buy to let were suspicious of this new market or, in some cases, openly critical.
Paragon’s experience, however, was consistently positive.
We liked working with experienced landlords, benefiting from the strong credit quality and margins they delivered.
By 2000, we were so convinced of the strength of the private rented sector (PRS) and buy to let going forward that we exited other mortgage markets and became the first UK lender to concentrate on buy to let alone.
Specialisation
By the early 2000s, buy to let had started to expand beyond ARLA and the panel lenders. Other major lenders started to develop products and the broker market started to get more closely involved, generating competition. Paragon’s response to this was to specialise at the professional end of the market where our product, distribution, underwriting and property expertise made a greater difference.
We worked with commercial finance brokers, rather than main market mortgage intermediaries. We kept an eye on mainstream buy to let though, and through our acquisition of Mortgage Trust in 2004, we were able to dip in and out of this market as it suited us.
Shoddy lending practices
During the 2000s, the rush for volume on the part of some lenders led to practices in the wider market that we weren’t comfortable with. Buy to let was often confused with property speculation and this happened at a time when some lenders’ controls were woefully inadequate, tarnishing the buy-to-let brand and the good work carried out by the majority of landlords. Buy to let was often cited as helping to cause the credit crunch – nothing could be further from the truth.
It was not buy to let that contributed to individual lenders’ problems, rather substandard lending practices.
However, as we slowly emerged from the financial crisis, it became clear the sector had performed much better than some thought it would.
Arrears on buy to let proved to be little different than mortgages in general and, for some of the more prudent lenders, like Paragon, arrears levels were, and remain, significantly better than market level owner-occupier arrears.
At Paragon, our experience through the financial crisis in many ways was exceptional.
Arrears remained low and the business was profitable throughout the crisis; Paragon did not require or seek support from the taxpayer and has remained independent.
Our frustration though was that global capital markets were so damaged that it was impossible to fund mortgages independently on a sustainable long-term basis.
Slowly though, confidence returned to the markets and by the Autumn of 2010, we had put a funding structure in place that allowed us to return to new lending. This was a milestone for us and the market. We continue to focus on supplying bespoke lending facilities for professional landlords, whilst tactically supporting mainstream buy to let, and it works well.
Today, a new wave of interest in buy to let is emerging, as lenders look to increase new business levels and improve margins.
Market evolution
The mortgage market in 2011 looks very different from the one we had in 2007.
Not only is gross lending roughly about a third of what it was, specialist markets other than buy to let have collapsed. There is little activity in the so-called near-prime market and practically zero in self-certification, which in 2007 were substantial niche markets. A lender looking for a high margin, niche market therefore has little option than to enter buy-to-let lending.
As for the PRS, as predicted all those years ago, it has gone from strength-to-strength. Housing in the UK today has a greater bias towards private renting than ever. Home ownership and social renting are both in decline and private renting is filling the gap.
On reflection, I think it unlikely that the PRS could have responded to the shift in demand for more affordable and flexible accommodation without buy to let.
All the factors that have driven this strong expansion in renting are set to continue and buy to let will be there to support landlords who seek to grow their portfolios.
It will not be without its challenges or problems, but I am absolutely confident that Paragon and the lending industry generally are well placed to meet them.
John Heron is managing director of Paragon Mortgages
