BSLS2022: There could be lender ‘casualties’ due to funding costs
Speaking on a panel at the British Specialist Lending Senate, Generation Home’s chief commercial officer Graham McClelland (pictured) said there was “demand out there for mortgage paper” and “real interest from investors for mortgages”, especially in the specialist space.
“I’m sure that in time that funding will sort itself out, but there may well be short-term, or even long-term casualties,” he said.
One recent example in the specialist lending market has been Molo Finance, that had to temporarily suspend its buy-to-let products due to capital market uncertainty. The lender also had to change some existing mortgage offers and postpone certain completion dates.
Anth Mooney, chief executive of Vida Homeloans, said: “If non-bank lenders stand still and fail to diversify their funding models, then absolutely, I think there will be some casualties.”
Mooney said that for non-bank lenders the next 12 months’ funding costs would rise given the “level of uncertainty in the macroeconomic and political environment.”
He added that when setting its funding strategy, the key consideration was, and is, “ensuring certainty” for both customers and intermediary partners so that once a mortgage offer was issued they can have full confidence that it will be honoured.
“I can’t stand here with a straight face and say that funding markets will always be open, but what I can promise with 100 per cent certainty is that once a customer has a mortgage offer from us, they will always get their mortgage, because we always pre-fund our offer pipeline,” Mooney noted.
McClelland said that timing is very important when it comes to funding, adding that Generation Home had made a forward flow arrangement at the start of the year.
He said that the company, which was founded in 2019 and is focused on first-time buyers facing affordability and deposit challenges, has two main funding lines, one from a traditional private warehouse, and a forward flow arrangement that give it “plenty of runway.”
“The availability of funding and making sure that you have enough runway to support you when times get tough is always the critical thing. That’s what keeps you awake at night, but there is also an element of luck, particularly as a small lender,” McClelland added.
“It feels like we’re through the worst of that pain. We’re working really hard on finding supplemental forms of capital that are not deposit-based but are not necessarily market-linked. So, watch this space.”
McClelland continued that savings’ rates are also going up, so deposit-based funding was also more expensive, which he said should mean big lenders start to raise pricing for their products.
“Raising retail funding from a standing start is not particularly any cheaper than accessing the wholesale markets. It’s just that over time, it gives you a more stable, broader base, particularly if you’re looking to grow your business to a balance sheet of £5bn to £7bn, and that’s quite important.”
Mid-size banks are eyeing the specialist sector
Mooney said that big banks are currently “not servicing anything that falls outside of an automated process” and for mainstream lenders “to pivot to a more specialist lender model, which requires face-to-face solutions, open flexible dialogue with brokers and deep human underwriting expertise is really expensive.”
He added: “It is clear that some larger and mid-sized banks have aspirations to move into that near prime space, that grey area between specialist and prime, a market that is quite difficult to accurately size or define. But I don’t see the larger players having the appetite or expertise to expand beyond that into more specialist customer segments.”
McClelland said that what was happening in the rungs below the biggest banks was interesting, as they might start looking at the specialist space.
“If all you’ve got to compete on is price, but you know you’re going to lose, which is what’s been happening, what do they do? What do the bigger building societies do? And where did they go next?
“I think that’s quite interesting to see whether they can do it quick enough to keep up with the more nimble specialists,” he noted.
Rising swap rates will lead to price correction
McClelland added that previously if swap rates, which are integral to lender product pricing, had gone up by five basis points in a week that would be a “big deal”, whereas now they have continued to go up and up.
“I think this might be the first time in mortgage market history, certainly within decades, that the average the average product rate for a 75 per cent loan to value (LTV) mortgage was sub-swap rate. That means the big banks are out there lending money at a cheaper rate than it cost them to borrow in the market and this cannot be the most efficient use of their capital.”
He added that this was aided by having a “huge sticky base of customers that cost them next to nothing.”
Mooney predicts that mortgage pricing will continue to rise in the coming months, and that Vida has repriced some of its products due to increased funding costs.
“Some of the rates being offered in the market are unsustainable and we should expect to see a correction in both buy to let and residential mortgage pricing in the weeks ahead,” he said.
He added that forward swap rates were up by around 100 basis points since the start of the year, the prime market has responded with price increases of up to 70 to 80 basis points, whilst the specialist market has been slower to respond, with rates increasing by only 20 to 30 basis points so far.
Mooney continued that with ongoing talk of recession, there will also be discussions had across all mortgage lenders about credit risk appetite and the availability of mortgage credit, especially at higher LTVs.
“The current dislocation between forward swap rates and bank base rate is driven primarily by uncertainty. It’s uncertainty that kills markets and that uncertainty will therefore drive into a lenders appetite for risk,” he added.
YBS Commercial adds relationship director to its North team
She joins from Lloyds Banking Group where she worked for around 19 years in various roles, including commercial relationship manager.
In that role she gained experience around real estate and client portfolio management, according to YBS Commercial.
She will be based at the YBS Commercial office on Cross Street, Manchester, and at the YBS branch on Fishergate, Preston, from which she will be covering the Northwest.
Guy (pictured) said she was delighted to come onboard and “use my skills to add real value to the business”.
Sarah Prescott, regional director for the North team, said: “I’m so pleased to welcome Jennifer to the North team. I have high hopes both for what she and the North team can deliver now that we’re operating at full capacity.”
Guy will be working closely with other North team members including Sarah Prescott, relationship directors Georgie McRoberts, Rob McFarlane and Chris Butler, who joined in April, and relationship managers Jack Dunne and Dan Wisson.
Landlords are still investing in property – Landbay
The private rented sector (PRS) makes up around 20 per cent of the UK’s housing market with about 13 million people living in rented accommodation and has more than doubled over the past two decades. Research firm Statista says there were two million privately rented households in 2000, rising to 4.43 million in 2021.
With the home rental boom came an increase in the number of landlords. HMRC data shows landlord numbers have risen by 52 per cent in eight years from 1.75 million in 2013 to 2.66 million in 2021.
Different types of landlords
The majority of landlords, 64 per cent, own between one and three rental properties, according to research by the London School of Economics on behalf of the National Residential Landlords Association.
The report, published in November 2021, shows that within this cohort, 32 per cent of landlords own one property, 19 per cent have two and 13 per cent own three. The other 36 per cent are portfolio landlords with four or more properties.
So, there is a wide range of landlord types from the amateur to the professional and those who are somewhere in between.
There is also an almost equal split between male and female landlords. The latest statistics from HMRC are a little dated but show that 48 per cent of landlords in 2018/19 were women. Between 2014/15 and 2018/19 tax years, the number of female landlords rose by 17 per cent to 1.25 million while the number of male landlords increased by 10 per cent to 1.38 million.
The attraction of property investment is that it can be a lucrative business, not just by generating monthly income and profit, but also as a long-term investment as you would expect property to rise in value.
Let’s take the years mentioned above. The ONS house price index shows the average house in December 2013 was valued at £177,971 rising to £274,712 in December 2021 – that’s a 54 per cent increase in eight years.
Busiest Q1 for buying rental property since 2016
Landlords buy and sell properties all the time and the start of this year has been the busiest in six years. The first three months of 2022 have been the most active Q1 for investors buying property since the three per cent stamp duty surcharge was introduced for second homes in 2016.
Research from Hamptons estate agency found that 13.9 per cent of properties sold were bought as buy-to-lets in Q1 2022, up from 12 per cent in Q1 the year before. The share of homes sold by investors fell from 14 per cent to 10 per cent in the same period, the lowest proportion in 10 years. The peak was in Q1 2016, as people rushed to beat the stamp duty hike – 15.9 per cent of homes sold were for rental purposes, and it has hovered around the 10 per cent mark ever since.
There has also been a rise in the number of properties sold by landlords and bought by other landlords. During Q1 of this year, 41 per cent of homes purchased by investors had previously been let and this has been rising steadily since 2018, when it stood at 25 per cent.
Strong rental demand
While it is true some landlords are selling up, there is strong evidence that buy to let is still popular and I believe it will continue to be as rental demand rises. Letting agents are reporting fewer properties on their books, yet more people are looking to rent and struggling to find accommodation.
The estate agency membership body, Propertymark, said the average letting agent had 142 applicants registered on their books in February 2022, a 73 per cent increase year-on-year. However, there were only five newly listed rental properties on average in each letting branch, which is 44 per cent down on a four-year average of nine.
The UK has a housing shortage and demand has always outstripped supply, whether that is for owner occupation, privately rented or social housing. Even if some landlords decide to leave the PRS there will always be others to take their place. Professional landlords, in particular, are expanding their portfolios and first-time landlords are venturing in too.
Catalyst Property Finance targets £500m loan book
Speaking to Specialist Lending Solutions, chief executive Chris Fairfax (pictured), said that within that £500m target it is setting its sights on non-construction bridging, ground-up development finance, construction bridging, and buy to let, at £100m to £150m each.
Fairfax said that buy to let is a vital component of this as it needs less origination.
“Short-term lending is hard work, you have to originate every 12 to 18 months because your loans, hopefully, have redeemed. Buy to let allows us to achieve some of our strategic goals,” he said.
The lender entered the buy-to-let space earlier this month, with rates starting from 3.74 per cent and up to 75 per cent LTV available, including those with cash-out.
Fairfax said that brokers and consumers they had spoken with said that they wanted “less restrictions on property”.
He pointed to several underserved areas, which include no exposure limits on multi-unit blocks (MUB), mixed use property, no restrictions on the number of bedrooms in houses in multiple occupation (HMO) and holiday lets.
Citing the typical market minimum at 125 per cent, Fairfax said that another opportunity would be less constrained by income variations, as its interest coverage ratio calculations are from 100 per cent of the pay rate.
He added that unlimited top-slicing was also available for high-net-worth individuals, and that the firm also has wide eligibility on adverse credit and different kinds of company structures.
“The feedback we’ve had from brokers so far is that there’s a place for it, but obviously they’d like it to be cheaper in terms of its interest rate. Ultimately, we have to find the right balance. We want to fund the right opportunities where it’s right for the borrower and right for us,” Fairfax said.
“We recognise our rates are higher, but we serve a market where there is a clear benefit in acquiring or refinancing because of either the yield or the capital.”
The firm issued £15m in agreements in principle on the first day that it launched its buy-to-let offering.
Fairfax continued that CPF currently has eight staff working on buy to let, who have been trained across bridging and buy-to-let too in case of a “big inflow of more kinds of business they can adapt.”
Catalyst is aiming to bring longer-term fixed buy-to-let products to the market, and is also considering green mortgage products.
Evolution Money launches app to cut processing and completion times
It includes an app, Evolution Money, which features a deeper fact-find questionnaire, know your customer data collection, digital ID verification and, document collection and storage.
Users can e-sign documents, book an appointment and receive status updates through the tool.
Open Banking via account score populates Evolution’s income and expenditure assessments.
The firm said the app allowed it to change its contact strategy, deliver the automation of its income and affordability assessments, and integrate all elements into a bespoke CRM system to help streamline the advice process.
It added that in the trial implementation stage, there was a significant reduction in funding times and efficiency gains within the entire operation.
The lender has ongoing plans to continue to develop the digital journey including a continuation of its ability to embed AI and machine learning into the process, to offer customers better products and making stronger-informed credit-risk decisions.
The app is available to download from both Android and Apple app stores.
Matt Meecham, chief digital officer at Evolution Money, said: “This transformation project began with a number of relatively minor, but significant changes, and quickly gathered momentum to help us integrate smarter technology into the mortgage application process.
“By doing this we could provide efficient, responsible lending decisions by simplifying the entire process and – through the clever use of tools – we could utilise technological advancements to streamline our online digital acquisition strategy.
“Our app has a customer focus, but advisers also benefit in terms of the efficiencies it adds to the process, the speed it delivers and our ability to secure smarter data collection. All parties also benefit from better communication, and a continued support and commitment structure from Evolution.
“This is an exciting moment for Evolution as we launch this digital journey fully into the market, and we are committed to more fintech-based enhancements that will bring a considerable benefit to both advisers and their second-charge clients.”
There are now finance options for most international investors – MFS video debate
Speaking on a Specialist Lending Solutions TV debate in association with Market Financial Solutions (MFS), when asked how the market had changed towards overseas buyers, James Riley, mortgage consultant at Oriel Finance, said: “The market has significantly improved over the last few years and it’s now at a level where there is an option for most international investors.”
As for challenges faced, Riley said the process could be more complicated depending on the property being purchased. He said the new-build market was very active, while second hand property purchases were sometimes “restrictive”.
He said the seller was “completely free to pull out of a purchase at any point up until exchange of contracts, which often isn’t until the very end of the process”. He said for this reason, it was important for brokers to hold their client’s hand through the process.
Richard Rinder, associate partner sales manager at Oriel Finance, said that historically there were fewer entrants to the market and the process was not as stringent.
However, as the market had grown, lenders started to realise it was a segment worth paying attention to.
“And with that comes development and more options,” he said.
Zahira Fayyaz, senior business development manager at MFS, said the lender was less restrictive in its own approach and would assess assets on whether they are fit for purpose and generate income.
Watch the video [10:54] hosted by Shekina Tuahene, commercial editor at Mortgage Solutions, featuring Zahira Fayyaz, senior business development manager at MFS, Richard Rinder, associate, sales manager for Oriel Finance and James Riley, mortgage consultant at Oriel Finance.
Sponsored content in association with Market Financial Solutions. For Intermediary Use Only
Altura Finance adds Guy Nyirenda and Francois Taljaard to management team
Nyrienda will launch, lead and develop a specialist lending proposition at the firm. He will bring on specialist lenders to its panel, develop a network of professional introducers and expand its team of advisers.
He was most recently a partner at Coreco for just over 13 years, where he worked within the specialist finance team and focused on large commercial, development finance, large portfolio lending and high-net-worth private finance.
Before that he was a consultant at Cobalt Capital for around four years, which followed just over two years as a consultant at John Charcol.
In his role, Taljaard will oversee operations and finance, as well as the recruitment of advisers and appointed representatives.
Taljaard joined the firm around a year ago and before that was head of employee benefits in L&C’s mortgages team for just over three years.
Prior to that he was a partner at Mercury FX for nearly four years, having previously been co-founder and director of Coreco, working there for nearly a decade.
Altura’s managing director Rob Gill (pictured) said: “We are delighted to have attracted two such experienced, well-respected individuals to our management team. Guy’s experience of the specialist sector is unrivalled and is a huge boost to our ambitions in this area.
“Francois has a wealth of experience running mortgage brokerages, which will be invaluable building the processes and infrastructure required for ambitious, sustainable growth.”
Catalyst hikes maximum LTVs across bridging range
First charge bridging loans are now available up to 80 per cent LTV, which is up from its previous cap of 75 per cent. The maximum LTV for light refurbishment bridging loans have also moved from 75 per cent to 80 per cent.
The top LTV on second charge bridging loans has moved from 70 per cent to 75 per cent LTV.
The higher LTV loans are available on loans between £100,000 and £500,000. The lender’s standard loan sizes range from £100,000 to £10m.
The LTV revamp follows Catalyst launch into the buy-to-let market last week.
Chris Fairfax, chief executive at Catalyst, said: “We believe higher LTV options for bridging and light refurbishment borrowers are going to be in stronger demand in the short and medium term; Catalyst believes this area is currently undeserved and represents good risk when carefully analysed.”
The bridging market has been gifted a win-win playing field – Lawrence Stephens
In this respect, time is of the essence. This stream of specialist financing is therefore typically used to fulfil a company or individual’s short-term capital needs.
Historically, the bridging lenders we represent have had a steady flow of repeat business, both from brokers and serial investors alike, and they seek to complete shrewd investments where the time to find traditional lending solutions does not exist – despite favourable rates and lower fees.
More recently, we’ve seen the bridging market operate at an unprecedented pace, as opportunistic investors look to take advantage of the hot property market, spurred on by the perfect storm caused by the pandemic.
House prices continue an upward trajectory, and the imbalance between supply and demand has left home sellers quid’s-in, while homebuyers scrape the barrels of the remaining stock.
For every hot property to enter the market, there will no doubt be a number of investors competing with your average homebuyer to secure a slice of the property-boom-pie.
At no other moment is this more prevalent than when the gavel slams down, and the sale has been agreed. The lucky winners turn to bridging finance to make sure they can close the deal within the tight timescales stipulated in auction contracts.
In such market conditions, our clients have had to raise their competitive game. Key areas to compete on have been the speed of financing, attractive rates, and diversity of products.
Over the past 18 months, we’ve witnessed bridging lenders work tirelessly to ensure the delivery of funds reach borrowers as soon as possible, often within days of receiving an application to underwrite. Whereas funds would normally take the best part of six to eight weeks to drawdown on with high street banks.
This has laid the groundwork for the seismic post-pandemic shift in appetite for fast money. One must only engage in light social media searches to see the steady and impressive roll-out of innovative new products on the market, in a bid to attract more customers.
Only recently, Kuflink Bridging announced the launch of a lending product targeting commercial buy-to-let opportunities. Meanwhile, they are considering entering into the consumer lending market later this year too.
Since bridging finance is largely unregulated, bridging lenders have had to strike a balance between charging profitable, yet competitive rates. Historically, bridging lenders have had the freedom to set their own interest rates, which has often made them the least financially attractive option.
However, resilient demand for properties has made sure that bridging finance remains an absolute necessity for investors to utilise.
Often, bridging lenders will rely on lines of funding, from high street banks or high net worth individuals. Meaning, recent forecasts of an increase in the Bank of England’s base rate, will likely increase bridging lender’s cost of borrowing. This means that a knock-on effect to borrowers is surely on the cards too.
The dynamics at play in the current market presents opportunities for both borrowers and investors, as well as bridging lenders. For the borrowers, the market landscape is forcing bridging companies to stay competitive, with customer service remaining at the forefront of their efforts.
Equally, the opportunities for bridging lenders are boundless, as the lending market has been met with strong demand following the influx of investment in the post-pandemic world.
How lawyers can support the market
We are being instructed on multiple transactions each day across the board of our lending client panel, often with extremely tight deadlines to achieve successful completions for the borrowers and our lending clients so they can maintain their competitive edge in terms of speed and commerciality are emanated by us too.
Recognise Bank completes £8.7m capital raise
So far, COLG has raised almost £65m in investment for the bank.
The capital will be used to support business lending and create a new team with an aim to build on the bank’s digital capabilities. This will include the development of new products and revenue streams.
The latest investment comes from two of COLG’s existing shareholders, PV27, the family office of real estate entrepreneur and digital pioneer, Ruth Parasol, and Max Barney Investment Limited (MBIL), the London based property firm. PV27 and MBIL exercised warrants received during the last fund raise in August 2021.
Recognise Bank recently reached £100m in lending, six months after receiving its full banking licence from the Prudential Regulatory Authority.
Bryce Glover (pictured), chief executive of Recognise Bank, said: “To receive this fresh investment from two of our keystone shareholders shows their continued support for Recognise Bank and commitment to our strategy and vision. Investing in our digital capabilities will help us build a world-class business bank, for today and the future.”
Phil Jenks, chairman of the City of London Group, added: “We have consistently delivered on time and in line with our strategy to create a new bank for Britain’s growing businesses, firms that are the lifeblood of our economy, but are consistently ignored and let down by the mainstream banks.
“The latest investment from Ruth Parasol and Max Barney is an important moment for Recognise, because it means the bank can build on a foundation of £100m in lending and £95m in savings deposits to push its digital capability even further and create a bank that perfectly blends speed, service and innovation.”