With such a dynamic market, it felt like almost every week we saw a new five-year high or first since records began – end of year industry data highlights how this year’s £45bn of gross buy-to-let mortgage lending is the highest for over a decade.

If the last two years have showed us anything it is that we have to expect and be ready to adapt to change. That said, I do think that some of the changes we’ve experienced throughout 2021 are not fleeting so recounting them provides some insight into ways the market may be impacted in future.

Stamp duty holiday regional impact

One of the most significant influencers of market activity was the stamp duty holiday.

While the fact that the tax saving on offer caused a rise in purchases will come as no surprise, the impact of the scheme when viewed at a regional level offers clues of a shift that we may see more of moving forward.

Looking at overall house purchase numbers, it appeared that the impact of the scheme was greatest in London, the South East and South West. However, when making comparisons to levels recorded in 2015 – the last full year prior to the introduction of the buy-to-let surcharge – we see that these regions actually experienced lower levels of purchase activity.

Conversely, in the North East and Yorkshire and The Humber, the stamp duty holiday saw purchases surpass 2015 levels.

The greater influence of the stimulus on these locations supports the idea that the north of England is increasingly offering opportunities for investors – a combination of healthy tenant demand and the relative affordability of property results in strong and stable yield performance.

Green agenda key for PRS sector

Even before the COP26 conference put environmental issues in the spotlight, the green agenda was gaining traction, its influence on areas such as political policy and investment increasing.

Paragon was one of the first lenders to launch mortgage products offering preferential rates for properties with EPC ratings A-C, incentivising landlords to increase the proportion of energy efficient homes in the PRS.

The government has proposed that all private rental properties will be required to reach this standard by 2028. Due to the older stock profile of the PRS, this will require substantial investment to fund widespread retrofitting of energy saving measures so sustainability is an issue that will continue to shape the industry in 2022 and beyond.

Importance of BDMs

During the year we learned a lot through our interaction with brokers and something that struck me was their view on the importance of business development managers (BDM).

Dispelling any rumours that the adaption of technology, accelerated by the pandemic, would reduce the need for BDMs, brokers told us that BDMs are very important.

Of those surveyed, 44 per cent of brokers said that the role of the BDM had become more important during the pandemic, a further 47 per cent feeling that they are as important as before.

With brokers feeling that important aspects of the BDM role include problem solving, availability and responsiveness as well as product knowledge it seems that the role is one that can be enhanced by technology and not replaced by it.

Research from Leeds Building Society, which surveyed 69 brokers on its broker panel, found that four in five advisers had seen an increase in enquiries around green mortgages in the past three months, compared to the prior 12 months.

Around 57 per cent said they had seen a significant increase in green mortgage enquiries in the past three months compared to the year before.

Nearly all those surveyed, 93 per cent, expected demand for green mortgages to increase, with half predicting demand to grow significantly.

The research also found that 43 per cent of brokers said clients would be more likely to choose a green mortgage over a lower cost standard mortgage.

Matt Bartle (pictured), director of products at Leeds Building Society. Said: “All the publicity around COP26 clearly has made more consumers think about climate change and what they can do as individuals to reduce their environmental impact.

“Our research with intermediaries supports our view this is an issue the public is engaged with and a market which brokers can expect to continue to grow.”

He added: “What we’re starting to see is a groundswell of opinion from more people who are recognising that change needs to happen and seeking products to help them reach their goals.”

According to the Green Finance Institute, there are around 20 lenders offering green mortgage products in the UK currently with 31 products between them.

However, one in six of the brokers surveyed said that more needed to done to increase awareness of green mortgages and energy efficient living.

Leeds Building Society brought out some green mortgage deals earlier this year that rewards those who live in more energy-efficient properties.

It launched a 95 per cent loan to value (LTV) carbon offset fixed rate deal in November. According to the lender it has received enough applications for this product to offset 3,500 tonnes of carbon.

House price growth has continued on its turbocharged trajectory, hitting double digits and outdoing the phenomenal 7.5 per per cent growth in 2020.

Supply chain challenges continued to hinder construction of new homes. The Suez Canal incident, Brexit and custom delays at ports caused material and labour shortages resulting in a supply crunch that contributed to UK house price growth.

The ongoing supply chain issues are also contributing to cost inflation – cement prices are up 40 per cent year-on-year and bricklayers are charging 33 per cent more than before the pandemic – with smaller developers and homeowners suffering the most.

The buy-to-let (BTL) market looks ripe for growth. Whilst the government’s punitive position is unlikely to change, the stamp duty changes unintentionally stimulated the market. In the low-rate environment, for the more active landlord looking for attractive income, amassing BTL portfolios is a solid investment. With leverage, an eight to nine per cent cash on cash return is achievable.

The big question is where interest rates will go. We should expect to see a rate increase in Q1, which would be a first step to reining in house price growth, although this will probably be marginal. The low mortgage rate war is likely to peter out as well, whilst the full impact of the pandemic is likely to put further pressure on household finances.

Alternative lending sector in ‘rude health’

Whilst H1 saw a de facto response from lenders of heavy retrenchment, with a far more conservative approach towards loan to value bands, assets and borrowers, as we approach the end of the year, the alternative lending sector is in rude health.

This year, 2021, compounded the old mantra that ‘An Englishman’s home is his castle’. Quite literally, people took stock of their homes, asking themselves ‘shall I paint it, refurbish it, knock it down, or buy somewhere better suited to my post pandemic needs’?

As the hunt for yield intensifies, the pool of borrowers has grown. Demand is back to pre-Covid levels, reflecting the strong performance of real assets, and residential real estate.

At the same time, there is more institutional capital seeking exposure to the sector than ever before, a trend that is set to continue into 2022. This is partly driven by their reluctance to take equity risk and see the mezzanine or senior debt part of the capital stack as an attractive income diversifier.

This year also witnessed a perfect storm of record low interest rates, high household saving levels, pent-up demand, government stimulus and pandemic induced changes to living habits. 2022 is set to be a bit of a wake up call.

What else? Green finance, which has taken off in the mainstream and listed markets, will move up the agenda of alternative lenders, driven by consumer, funder and peer group pressures. My Christmas wish list includes the government getting serious about the supply of new homes – I want to see quality, well thought out new build schemes that make the most of the English landscape.

A rebate on stamp duty land tax for smaller developers would be a starting point. And addressing the affordability issue is also critical, to support first-time buyers.

Whilst it’s true of all industries, it’s particularly important for mortgages and housing as just over one-fifth of all the UK’s carbon emissions come from our homes, according to the Energy Saving Trust. 

In mortgages in particular – our sphere of expertise – unlike 20 years ago, we are seeing real life products exist which reward green behaviours. Previously, demand may well have been in place but it didn’t have the requisite supply. 

These products will become increasingly sophisticated as we move forward, and we’d also expect to account for a far larger number of searches and purchased mortgages in the future. 

According to a recent IPSOS Mori poll, there’s an increase in consumers at all age ranges saying that they will act green. But also in that survey, respondents showed that they remain more concerned about more immediate concerns like keeping a roof over their heads. 

We can, of course, combine the two by recommending the green mortgage but current best practice means that we are required to always offer the best value mortgage. Sometimes, that’s the green option, but not always. This is an area in which we could all make a considerable difference. 

Working towards change 

How will we make this difference? Through ‘collective leadership’. If we act now, we can be part of the solution as opposed to compounding the problem. 

So what does collective leadership in our industry look like? 

The first step has to be that we understand that we have a role to play in delivering net zero. 

The next step is to make sure that we operate from a level playing field: that all customers are shown a green option as part of their range of options. By acting as responsible businesses, lenders, brokers and intermediaries, we will genuinely make a difference by helping consumers to choose greener options by simply having them consider them in the first place.  

That would, in turn, encourage lenders to bring more green products to market. 

If we don’t take this voluntary approach, my gut instinct would be that we may end up being forced to do so by government or by the Chancellor similar to what has happened in the aviation and car industries.  

Let’s act before we’re taxed and made to do so. 

Aiming for success  

Will this approach work? 

It simply has to. We need to inspire positive behaviour change from people who simply want to buy a home affordably, as simple, fast, and efficiently as possible. That’s going to require a commitment from our industry. 

Our industry’s fear is that by acting alone, we will lose business to competitors who offer lower priced deals or don’t mention green products at all. That’s precisely why we need collective leadership on this campaign. 

My sense is also that we still have a lot of efficiency gains to be made in our industry, which would more than offset the costs of going green. Using a turnkey mortgage platform prevents brokers from typing in the same data twice, for example. 

If we’re able to draw on the many bright sparks and talented individuals in our industry and combine them with all the data available, as well as process and efficiency gains, then this will work. But it does need to be a collective effort. 

Our industry has fallen far behind many other sectors in doing our bit for the green agenda. Let’s come together to do better. 

The hub will also have a library of articles, reports, tools and pilots related to the green mortgage market.

It aims to encourage lenders to enter the green mortgage market and to provide a “trusted source of information” for mortgage intermediaries, policymakers and non-government organisations (NGO).

Green mortgage products can either offer improved mortgage rates for customers building or buying more energy efficient homes or provide additional borrowing options along with an existing loan to those looking to improve their energy efficiency.

Other products offer tools to help customers understand home improvements they can undertake on their property to improve their energy efficiency.

The green mortgage market is growing in popularity, with 10 lenders brining out such products since the start of the year.

Recent Intermediary Mortgage Lenders Association research, showed that 77 per cent of lenders were planning to launch green mortgages that were cheaper or priced the same as a typical product.

Emma Harvey, programme director at Green Finance Institute, said: “The finance sector is starting to embrace the opportunities that green products offer to support their customers in the decarbonisation of their homes, and providing information, tools and case studies can help to encourage innovation.

“The Green Mortgage Hub will provide a snapshot of UK green home financing, acting as a resource for lenders to continue developing innovative green home finance solutions.”

Currently the hub has 31 products listed on its table and five pilots, initiatives or tools.

In its green BTL mortgage range its two-year fixed rate at 65 per cent loan to value (LTV) stands at 2.99 per cent, down from 3.04 per cent, whilst its five-year fixed rate at 65 per cent LTV has fallen from 3.09 per cent to 3.04 per cent.

At the 70 per cent LTV tier, its two-year fixed rate is now 3.04 per cent, down from 3.09 per cent, and its five-year fixed rate has decreased from 3.24 per cent to 3.09 per cent.

The lender has also added limited edition large loan products for standard and HMO properties, with five-year fixed rates starting from 3.07 per cent. It comes with a 1.5 per cent product fee and is available for loans between £350,000 and £1m.

Limited large loan products are also available for HMOs and MUFBs up to six bedrooms, with five-year fixed rates beginning  from 3.38 per cent. Products come with a 1.75 per cent product fee and loans between £350,00 and £1m can be accessed.

West One Loans has also improved its criteria and will now consider new build properties up to 75 per cent LTV without prior referral, up from 70 per cent LTV before.

Andrew Ferguson (pictured), managing director for West One Loans BTL division, said: “These new products and rate changes support our aspiration to become the ‘go-to option’ for brokers in the BTL arena.

“Our continued focus on service delivery and common-sense underwriting, aligned with these product changes, mean we are well placed to support our broker partners and their landlord clients as we move toward the end of the year.”

Some lenders are working with organisations such as Sero to gain a better understanding of the environmental risk and impacts of the homes they lend on to create suitable finance options outside of and in addition to the typically used EPC rating. 

So this week, Mortgage Solutions is asking: Is it time for lenders to collectively adopt a more comprehensive approach to climate change and environmental factors to successfully work towards green initiatives? 

Jane Simpson, managing director at TMBC 

Data published by the Business, Energy and Industrial Strategy Committee highlights how domestic properties are responsible for approximately 19 per cent of greenhouse gas emissions. 

It is unsurprising then that tackling the environmental impact of housing is a significant focus of the government’s drive to net zero. 

Although the entire industry has a responsibility here, lenders are well placed to make a positive contribution. For example, valuations and underwriting that place emphasis on the environmental impact of a property help to make sustainability an important consideration for buyers. 

Incentivising the purchase of homes with EPC ratings A-C with green mortgages supports this and while it is fantastic to see an increase in such products, it is also important to note that a substantial proportion of existing private rental sector (PRS) stock will need to be upgraded to meet the government’s proposed standards. 

This means that opportunities exist for lenders to launch innovative refurbishment products, or bridge-to-let options, for example.   

A substantial number of homes are unencumbered or have not changed hands for many years, raising questions around the reliability of EPC ratings.  

Even if we were able to accurately assess the number and extent to which properties need upgrading, the current issues around labour and materials may mean it is simply not possible in time to meet the government’s quickly approaching deadline. 

While there is clearly lots that the PRS can do, I feel it is a responsibility that should be shared – by making changes and using less energy in the first place. We can all lessen our impact on the environment.  

Jonathan Clark, mortgage and protection adviser at Fairstone Wealth Management

Until now, the majority of UK homeowners have had little interest in, or knowledge of the environmental impact of their homes.  

But this is surely set to change with the increased focus brought about by recent events such as the COP26 conference and the soaring cost of heating any home. 

We’ve recently seen the emergence of so-called ‘green mortgages’, these offering a marginally lower rate and/or modest cashback on more energy efficient homes but this is based purely on a crude EPC rating and acts more as a modest reward, rather than a true incentive. 

In order to modify a potential purchaser’s behaviour when they’re choosing a new property, there needs to be a significant, meaningful and long-term benefit to the consumer if they were to choose a more environmentally friendly home – how much are they likely to save each year?  

 Could this mean a lower mortgage interest rate for the long-term, and how much could this save them? If it’s a new property – what was the overall environmental impact of its construction and materials used? 

So, what part can lenders play here, and what’s in it for them? Well for starters, they could get together and agree to be more flexible in the type of property they are prepared to mortgage – supporting more ‘non-standard’ construction types, self-build and long-awaited ‘modular’ builds pioneered by L&G as these tend to have a much lower overall environmental footprint. 

Many of today’s purchasers are now driving around in electric cars, and they’re going to want to park them in front of an equally ‘statement’ property. 

Jonathan Stinton, head of intermediary relationships at Coventry for intermediaries 

With the green debate high on the global agenda, it’s becoming increasingly clear that nations need to work together if we are truly going to be able to combat climate change.  

In the same vein, collaboration is essential between all parties in the mortgage market – brokers, borrowers and lenders, as well as the government and local authorities.  

Whilst collaboration is vital, however, it doesn’t mean that all lenders have to adopt identical approaches. Each lender will be guided by their own plans, appetite and back book, and for many the move to becoming ‘green’ will be a journey, with propositions and products evolving over time. 

It’s important to look beyond the relatively simplistic view of EPC bands. Whilst EPC ratings and Standard Assessment Procedure (SAP) scores are a way for us to measure energy efficiency, they shouldn’t be the main point of focus.   

They are a useful indicator for homeowners to understand the energy efficiency of their home but they don’t provide any actionable insights. Each homeowner will have their own needs and circumstances, and tailored support on the initiatives and improvements that are most appropriate would be far more beneficial.  

A one-size-fits-all approach to simply reach a target rating therefore seems rather short-termist. 

EPC ratings don’t take into account many other factors that affect energy consumption, such as how many people are living in the property, or how they’ll choose to use the property. An EPC won’t reveal whether the windows will be left open all year round while the central heating is on, or if the property is only going to be occupied in the warmer and lighter summer months.  

Whilst some home improvements will require a significant financial investment upfront, that may take several years for homeowners to realise the longer-term financial gains, there are smaller changes people can make to improve their homes’ energy efficiency more immediately. And the industry has work to do on educating homeowners about these, too.  

It allows borrowers to offset the carbon footprint of their property during their mortgage term, which can be two, three, five or 10 years. It is available for all properties, regardless of their energy efficiency rating.

Leeds Building Society has estimated that the average property produces around 4.2 tonnes of carbon per annum for heating, lighting and power usage, and will offset that.

The mutual added that it would also be investing in forecasting the environmental impact of each home during the initial fixed term of the mortgage.

Matt Bartle (pictured), Leeds Building Society’s director of products, said that it was the first lender to offer purchasers this method of addressing their home’s carbon footprint via their mortgage.

He added: “This new carbon offsetting benefit for purchasers is available with a high LTV mortgage on any property whatever its EPC rating, as we understand bringing up your home to the highest standard can be expensive.

“We hope our offsetting of the home’s carbon footprint during the mortgage fixed term gives the buyer that time to consider next steps, such as saving up for improvements they need like a new boiler or replacement windows.”

He added: “This is a new and developing market so we’re launching our latest innovation on a pilot basis to gauge consumer appetite as we explore how to better support our members as they look to reduce their impact on the environment.”

The lender currently offers cashback mortgages and discounted rates for energy efficient homes and also runs a tree planting project in the Yorkshire Dales linked to its children’s savings accounts.

The mutual plans to achieve carbon neutrality for director emissions and indirect emissions this year, which it says is 12 months ahead of plan.

Given the fact that, by conservative estimates, the adviser community is selling three out of four mortgages in the UK, then that presents a number of issues, not least for those lenders currently offering these products.

Amidst the growing number of lenders offering, at the very least, green-tinged products it’s important to question whether specific specialist products of this nature are required, or as many argue, wouldn’t the options they offer be better as part of a standard mortgage?

There is also a question to be asked about what type of borrowers and properties they should be aimed at, and whether some lenders are completely missing the mark by, for example, offering ‘green’ incentives to those who are buying top-of-the-class EPC-rated properties anyway.

I would suggest they do not, and the focus should really be on getting existing UK properties up to the highest EPC standards, not merely giving those who have already bought, or about to buy one, the mortgage equivalent of a pat on the back.

Rental properties could drive change

It also seems clear to me that it will be landlord borrowers and buy-to-let lenders who (at least initially) have to lead the way here. Landlords already have a requirement that a property can’t be let out if its EPC rating is below E, and that will go up to below C from 2025.

For many landlords who want to keep letting these properties out, that’s going to require some potentially significant investment, and it therefore seems to make perfect sense for landlords to be offering these borrowers mortgages which incentivise them to get up to that level.

In the owner-occupation space, I think we can all guess that UK properties are going to go the same way in terms of their EPC requirements. Therefore again it would seem to make sense to be providing products which incentivise homeowners to understand what they currently have EPC-rating-wise, what improvements are required, and what potential mortgage-related incentives are available.

Currently, making those incentives part of a standard mortgage might appear to be a bridge too far, but it would only take a small number of lenders to move in this direction and I suspect an industry trend would emerge.

The argument against this change might be that it’s likely to add basis points to the mortgage but I’m not so sure – particularly in a low interest rate environment – whether that would be so concerning to borrowers if it meant they were being encouraged to fund improvements to meet those EPC targets.

Moving EPC target

I think we have to give lenders the benefit of the doubt and some time accepting there is a certain degree of learning on the job with green mortgages and green criteria particularly when we’re still not quite sure what is going to be required EPC-wise in the future.

However, it seems somewhat obvious that the focus has to be on encouraging and incentivising improvements to existing housing stock, and that those who own properties which already meet the very highest standards will, by design, not need that help. Perhaps switching incentives for the latter group into the wider borrower cohort would be a start, and then we can do much more to support borrowers – landlord and home owner – in getting their energy-inefficient houses in order.

Speaking to Specialist Lending Solutions after Brightstar’s 10-year anniversary, chief executive Rob Jupp said: “When we started back in early 2011, there really wasn’t a specialist lending market in operation in the UK market, it was entirely shut, so we had to do our bit to reopen it.”

He said this was because the market was still recovering from the global economic crisis and credit crunch, which impacted the liquidity of the UK lending market.

According to Jupp, this meant a lot of borrowers were not able to buy a home as they did not fit traditional criteria and could not borrow.

He said: “Unless you were middle aged, middle class, low loan to value and a home mover you would really struggle to obtain a mortgage. I looked at them [other borrowers] and would wonder ‘why on earth is this client struggling to obtain a mortgage? They have a good job, there is no damage in the background like excess credit, it’s just a little bit unconventional’.”

He said the specialist market started to gain momentum with the likes of Precise and Together in 2012 and 2013, and then in 2014 and 2015 the “world and their wife decided they would fund a lender in that world, and the rest is history”.

After a decade in the specialist market, the company has worked with nearly 30,000 customers on 18,000 completions worth more than £5bn. It also has grown its reach to 75 per cent of the intermediary market and its team has expanded to 85 employees.

Speaking on more recent market conditions, Jupp said the specialist lending market “fared well” during the pandemic, especially those who used automatic valuation models at a time when valuers were unable to visit sites.

“Most of our lenders continued lending, only a small number didn’t. There was a lot of maturity, most lenders didn’t knee jerk. They worked with borrowers and supported borrowers with payment holidays.”

He continued: “The pandemic has created a massive, renewed spirit of opportunity, where the specialist market is now awash with potential borrowers that need to use that market in order to provide an entry to home ownership.”

He added that consumers were more aware of the specialist lending market and said there were increased options to achieve home ownership outside of traditional lenders.

“The specialist lending market is a very good pathway and entry point in to lending. There is no shame at all about using a specialist lender for a mortgage. You could be self-employed or have different income streams or had a tax issue in the past, or you want to buy a property with unusual construction or build a property in your garden. You can do a range of things.”

He added: “In the past if you needed a specialist mortgage you were sub-prime, and that could not be further for the truth now.”

Green agenda

Looking ahead, Jupp said the question around how to reach carbon neutrality would become increasingly important to lenders, particularly as one of the largest pollutant emitters is property .

Jupp added: “What we are finding is a revolution whereby it will be commonplace that people who take green mortgages will be very much rewarded and incentivised by their lenders on the basis that they will get a better price for their assets if they are more environmentally sound.

“That is growing by the day, not just because of COP26. Every lender I speak to the green agenda is at the forefront of everything they do.”

He cited upcoming legislation in three years’ time requiring landlords to get their existing properties to an EPC rating of C or above as an example of this, adding that many were uncertain as to how they would fund it as the bill for portfolio landlords especially would be “significant”.

“I think a lot of lenders in the mainstream market in the years to come will say if you’re buying a particular housing stock that isn’t energy rated A, B or C you might not be able to get a mortgage, we might not lend on that. Actually, energy ratings may be as significant as someone’s current credit rating,” he said.

He added that from a product innovation perspective, the specialist lending market had a key role to play and its actions would inform the mainstream market.

He said: “If we do it right, what we do is provide the environment and a template for mainstream lenders with cheaper cost of funds to replicate and produce mass market solutions. That’s where the specialist lending market is so imperative in the UK as it gives the intellectual capital of ideas to the mainstream market to improve on for the benefit of consumers.”

Changing role of the high street

Jupp said pandemic had “sped up the inevitable demise of the high street as a place to shop and to eat” and it would now be a “place to live”.

He said five years ago it would have been rare to get planning permission to convert flats above shops and there was no real need as retail tended to be on long-term contracts.

However, the high street has since changed with the growth of out of town and online shopping. That has left “swathes of vacant properties at ground level and above that are absolutely perfect housing”, Jupp added.

He said he expected the process of development to become “easier to realise” and this would occur on almost every high street. He added that this was already occurring in some areas.

“The CBD [central business district] is not going to be a place where people just go to shop and eat. It will be a place where they live, and probably eat and probably shop, but not very often. There might be a few nice shops and a few corporates, but it will be mainly independent retailers, nice restaurants, and places where you want to live,” he said.

This would provide opportunities for renovation, refurbishment, conversion, bridging and and so on, and will be something the specialist lending market should keep an eye on.