Please see an interview with Paul Howard – Head of Intermediary Sales – at The Mortgage Works (TMW), one of the UK’s leading buy-to-let lenders. Property investors were recently very interested in hearing that TMW were the only mortgage company in the current marketplace to raise their loan to value ratio to 80 percent. We ask what was their reasoning behind this, particularly as several other prominent lenders have failed to follow suit, as well as looking into their thoughts on the short, medium and long-term; how lender behaviour has / is changing; the new Financial Policy Committee (FPC); the new build phenomenon; Local Housing Allowance lending and more:
1) Can you start by giving a brief history of TMWs’ presence in the UK buy to let market? Sure, the Mortgage Works actually began as the Sun Bank which was a subsidiary of Sun Life Canada (an insurance company). In the mid 1990s, the company started lending in what was then termed as ‘residential investments’ (the term ‘buy-to-let’ was pretty much non-existent at that time). The company was subsequently acquired by the Portman Building Society and, in 2002, the name was changed to The Mortgage Works. In 2007, Portman merged with the Nationwide and the company has been a subsidiary ever since. Today, we are one of the two largest buy-to-let lenders in the UK (the other being Birmingham Midshires) and are very comfortable in the market place.
2) Many investors were excited to hear that you were the first to offer 80 percent loan to value with a competitive pay rate after an extended period of buy to lenders taking a stricter attitude – what was the rationale behind this and, perhaps more importantly for our readers, is it a sign of things to come? The move to 80 percent loan to value was essentially a direct reflection of how our buy to let lending portfolio has performed throughout the recession. As a company, we are proud to say that we have historically been prudent lenders and, as a result, coped well in what has been the worst economic downturn since the 1930s. Additionally, the recent changes in the market place also influenced our decision to decrease down-payment requirements. When compared to a year ago, the housing market on a general level has seen some improvements – for example, the drops we witnessed in 2008 and 2009 are in no way as severe as they are today. Additionally, we are of course witnessing a very low bank base rate which has helped manage affordability and kept our delinquency levels low. So, overall, our business model has remained successful and, consequently, we like buy-to-let and want to increase our presence. In answer to the second part of your question, I would very much doubt we would be increasing it for a while as we appreciate that – whilst the market is improving – things remain very fragile, particularly from a broader economic perspective.
3) Generally are you lot more confident about the buy-to-let market now? Absolutely, and I think buy-to-let investors should be too. The main reasons are that properties are much cheaper and are offering more solid returns than what was perhaps becoming the case in the build up to the credit crunch. For those that already own buy-to-let property, most have seen an improvement in their equity position in the last year and many (such as those on trackers and variable rates) have benefitted from very low mortgage payments. Furthermore, bringing in factors such as an increase in the amount of people looking to rent as well as lack of supply of housing in the UK – we feel it is certainly an advantage to be in the industry.
4) As the UK enters into a slow recovery period – what do you think will happen in the short/medium term buy-to-let market? Yes, the economy still remains in a relatively vulnerable position and our view is that we will remain in a low rate environment for some time to come (even they do start to rise I think it would be at a slow pace). However, we also expect to see a continued level of subdued lending. The Council of Mortgage Lenders’ (CML) forecast on the total market size is at £150 billion for this year; last year it was £142 billion, representing a very negligible rise. Indeed, nobody within the industry is suggesting that next year is going to be any different. So I believe that buy-let-investors should be expected to see very slow to modest growth due to the fact that banks these days are ever concerned about their own ability to borrow from the money markets and many are also facing securitization issues. The level of growth that the buy to let industry will witness in the medium term will depend on the willingness of more lenders to come back into the marketplace – at the moment many have the scourge of the recent past weighing over them and view buy-to-let as risky. It should also be noted that most of what is being said here applies to the overall market and not just buy to let.
5) Continuing on this point and looking back to the onset of the credit crunch a few years ago – do you think, on a general level, that buy to let was taken far too lightly by lenders in general? I would not say in general, more by some. I think that many practices that were undertaken are now clearly viewed as a mistake which has resulted in more usage of the word ‘toxic’ to describe them – which is a great shame as our experience of them has been everything but toxic. One example would be the ‘day-one’ remortgage: a process where investors were able to effectively pull out their initial down payment, often with extra cash to spare in a very short space of time – whilst many were able to build their portfolio quickly using this method, when the market changed it meant that banks were exposed due to having large portfolios of clients with very little/no equity. Another example would be lending to so-called ‘property clubs’, who largely focused on pooling investors funds together to buy over-valued stock only for the market to crash, leaving enormous debt positions and very unfortunate consequences.
6) And going on from that, how has TMW’s underwriting procedure changed since the credit crunch? I don’t think the procedure has changed hugely – as I mentioned above, we have always been relatively careful lenders but it would be fair to say that apart from stricter loan-to-value ratios we are also requiring higher payment calculations as well as placing a particular importance on any applicants credit rating (the criteria of which has also increased slightly and which also applies to existing customers). Overall, however, we are using the same processes as before with buy-to-let: a professional surveyor will inform what the open market value and realistic medium-long term rental figure is for a property which will enable us to determine the viability of providing the loan – a fairly robust practice followed by most lenders which I would not imagine to change for some time.
7) We wanted to get your thoughts on the recent inception of the Financial Policy Committee (FPC) in relation to the future of the buy to let industry? It’s probably too early to tell but the new body certainly intends to regulate the buy to let market which will certainly affect the way lending procedures are managed across the board – this is going to be a challenge for both lenders and landlords. For us at TMW, however, such regulation is unlikely to make that much of a difference as we already treat buy to let mortgage / further advance / remortgage and other secured lending applications in exactly the same way as we do with regulated prime applications. Any mortgage application made through the Nationwide is already subject to the necessary controls of the FSA so we would need to adapt according to the new regulations – yet we do not envisage this as being a significant overhaul of our existing practices.
8)You mentioned new-build property clubs before – the property investment community has, in recent times, noticed a large amount of this stock come back on to the market place – perhaps more realistically priced in light of the market changes. What are TMWs thoughts on lending on these types of property? We have, for some time, had some concerns about new build apartment blocks in particular – in fact, we stopped lending on them back in December 2004 (although we do lend on new build houses). As I mentioned above, our reasoning for this was the glut of over-priced properties combined with several unscrupulous investment clubs effectively playing the mortgage system – another reason which eventually fuelled the collapse of the market. Whilst you are right that this position is passing now, I still don’t think we are at the stage where we are comfortable to lend on them as yet. I think the majority of buy-to-let lenders would concur due to the fact that it was not too long ago that eye-wateringly large sums of money were lost as a result of going too heavily into this market. Another concern that is readily apparent is the fact that it remains very difficult, from a surveying perspective, to truly value new build properties due to, firstly, a lack of comparable sold data due to the current low activity in local market places and, secondly, the issue of many developers releasing their stock in batches – thereby changing the valuation dynamics (something that has, for a long time, effected the way we view this type stock). Readers who are still interested in buying new build should not that there are lenders out there who will work with new-builds, but it is highly likely they would offer a product with a low loan to value and undertake fine-toothed due diligence to ensure that their interest in the asset is protected.
9) What are your views on landlords who house Local Housing Allowance (LHA) tenants? We have no issues with lending to landlords who let to LHA tenants – our position is focused around the property owners ability to maintain the loan and the fact that he/she would have carried out appropriate due diligence upon application (which we would obviously verify during our underwriting procedure). We will undertake the necessary checks on the landlord and NOT the tenant as it will always be the former who will be looked into if things go wrong (which, in reality, they rarely do). This is the approach we have adopted for the last 2 years and seems to be working very well.
10) What would be your advice to property investors and landlords to best prepare themselves to obtain a buy to let mortgage? The importance of keeping a spotless credit record cannot be understated, as the merest glitch at the moment can sabotage your entire application (this goes for any buy-to-let application, not just with TMW). As important is to undertake detailed due diligence – focus on the area (schools, hospitals, shops, banks, chemists and other local amenities); the specific location; demand / supply; what tenants you are likely to house; earnings; yield comparables; crime statistics; transport links to name a few. One of the many advantages of the modern times we live in is that most of this information is readily available for free!
11) Lastly, what about remortgaging? Would you adopt a similar lending policy to how you would a purchase mortgage? Our lending principles with regards to re-mortgaging remain broadly in line with house purchases – the process does often tend to move quicker due to most of the information we need already being in place (such as Assured Shorthold Tenancy agreements and other relevant documentation pertaining to the property). At the moment, we are seeing that many existing investment property owners are not needing / wishing to re-mortgage so as to maintain the favorable terms they are currently receiving as a result of the low bank base rate. The fact that it is not financially in their interest to remortgage has had an effect on this side of the market for us – but we expect this to gradually change over time.