Paragon Bank to launch specialist residential mortgages

The bank will seek to serve the self-employed, complex income cases and those borrowing into retirement. It will market the products through mortgage advisers.

Paragon Mortgages managing director John Heron said: “Paragon Bank has identified an opportunity to extend its product range into the residential mortgage market. Particular areas of focus will include the self-employed, complex income cases and those borrowing into retirement.

“We are planning a measured roll-out of our residential service in the new year, initially working with key business partners.”

The move follows a gradual restructure of parent company Paragon, which saw Paragon Bank take on a bigger role as funder of lending products.

According to parent company Paragon’s full-year results, out on 23 November, retail deposits in Paragon Bank increased 164.4% over the year to September, from £700m to £1.9bn.

The deposits now represent the group’s primary source of funding for new lending, with its traditional securitisation approach taking a more tactical role as and when conditions in that market are attractive, Paragon said.

The group also acquired asset finance business Five Arrows Leasing last year, followed by Premier Asset Finance in September, which it said allowed it to diversify including the launch of a development finance proposition.

Paragon posted a 12% lending drop in the buy-to-let space in the year, with completions down from £1.33bn in 2015 to £1.16bn this year.

Despite this, the firm’s total completions and asset purchases were up 11%, from £1.49bn to £1.65bn. Underlying profits were also up 9% to £147m.

More complex buy to let

The firm said it had experienced a “year of two halves” in buy to let with strong completion levels seen in the run up to the stamp duty increase in April followed by a reduction in activity levels across the market thereafter.

From April buyers of second homes were being charged an additional 3% stamp duty surcharge, leading consumers rushing to close deals in the months prior.

The government is also reforming the amount of tax relief landlords of residential properties get for finance costs, restricting it to the basic rate of income tax from next April, which further dampened the market.

What’s more, in September the Prudential Regulation Authority (PRA) announced tougher underwriting standards for buy-to-let mortgages, including a new assessment for portfolio landlords of four properties or more.

Paragon said the changes would realign the sector, introducing more complex buy to let cases. The firm has already seen the share of complex new cases rise from 45.5% going into 2016 to 61.8% going into 2017.

It said in its results: “Whilst this increase in regulation may act as a further constraint on market growth, the group is well placed to benefit from any realignment this may cause among participants in the sector. Early evidence of this is seen in the growth of the proportion of the Group’s pipeline relating to complex buy-to-let.”

Heron said: “Whilst the buy-to-let market has had a challenging year, we continue to see the potential the sector has to offer. With strong rental demand, there will continue to be a growing need for professional landlords to provide quality, private rental accommodation and, with our 20 years’ experience in the market, we remain very well-positioned to work with these landlords.”

New opportunities in second charge

Paragon Bank’s originated second charge loan book grew 361.3% in the year, with advances stood at £45m in September.

Meanwhile, the pipeline of new business more than doubled from £4.4m in September 2015, to £11.5m.

The firm’s average loan size was £57,000 and the average loan to value ratio in the portfolio 68.8%.

None of the bank’s originated second charge mortgage accounts were in arrears at 30 September 2016, Paragon said.

Second charge mortgages became regulated by the Financial Conduct Authority in March 2016, effectively bringing them in line with their first charge equivalents.

Paragon said: “Whilst these changes disrupted market volumes at the time, they generate further opportunities for product development and broaden the available distribution options for the group’s second charge mortgage products.”