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Birmingham Midshires on Buy To Let Mortgage Lending in 2010/11

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Further to our previous interview with Paul Howard from the Mortgage Works, we were very pleased to be able to ask BM Solutions some questions on the current market place.  The company has been very well established in buy to let for almost 2 decades (with a current 40 percent market share) and has remained in a solid position despite the obvious difficulties that have occurred over the last few years. We talked to head of sales Phil Rickards on a range of topics including the company’s history; confidence levels amongst lenders; BM Solution’s short / medium / long term strategy; risks from a BTL lending perspective; new FSA regulations (the Mortgage Market Review); the BTL lender-borrower relationship moving forward and the future of new build property.

1) Can you talk through the history of BM Solutions in the buy to let market? We have been established in the sector for many years now. Personally, I have been with the company for 18 years and witnessed a change from what was once a building society with less than 1 percent share of the mortgage market into an Intermediary dedicated BTL Lender accounting for around 40 percent of total lending in the buy to let sector alongside our House 2 House proposition ,which is basically a 2nd property and self build scheme.

2) Why was the decision made to focus specifically on buy to let? It’s where our strength has always been.  We did, in the past, lend in other sectors such as self-cert and subprime but the majority of our business has always been in the BTL sector – and it’s where we always saw the future of BM Solutions.  Indeed, we have remained fully committed to the UK BTL market despite the current tough economic conditions.

3) Do you think there is generally more confidence in the buy to let lending market despite some recent drops? The credit crunch has obviously had a massive effect on the property market in general – for our buy to lending levels the situation is no different.  For 2010, the BTL market should account for around £10 billion of mortgage lending whereas, at its peak, a few years back it was at £47 billion.  Despite this, there is definitely more confidence appearing in the market with our own research telling us that BTL borrowers are taking a longer term view of investment than was perhaps seen before – our research has pointed to people looking at between 15 to 20 years.  Today, what the market needs more is some healthy competition and it’s great to see some new lenders or previous lenders in the sector returning.  This has got to be good news for landlords.

4) 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? Talking from BMS’s perspective, we have never taken buy to let too lightly – we have always stated clearly that it should be treated as a long term investment and landlords / borrowers really must do their homework before entering.  The days of entering the market for fast profits have gone. Of all the lenders, we have remained totally committed to this sector and, whilst this has been difficult in the current economic climate, we will remain steadfast.  It’s fair to say that we have had to make criteria changes to ensure that we continue to support the sector. The market has changed dramatically so we have adapted our proposition in line with the new conditions to ensure that we continue to lend responsibly.

5) From a lending perspective – what do you see as the main risks as the country begins its slow recovery? The main risk is that the recovery is not going to be quick. Lenders and borrowers, need to maintain awareness that recovery is going to be a long and drawn out process.  As for BM’s target market, there is a solid bank of mortgage intermediaries who have come through the financial crisis and remain in the sector for the long term offering professional mortgage advice to new and existing Landlords.

6) Where do you see the key areas of growth in terms of your own buy to let lending procedures? As I mentioned, like any other lender, we have had to revise how we operate in the market. For 2011 specifically we are in good shape.  We feel confident about entering the year with a consistent proposition which I think the market needs.

7) Do you see higher deposits as something that will remain for the medium term future? I think it’s important to manage landlords’ expectations and certainly as far as BM Solutions is concerned, we have no plans in the short term (ie. 2011) to change criteria, particularly with regards to loan to values.  That’s not to say that they will not change in the future but I can easily see 2011 remaining level in line with our present criteria.

8)What are your thoughts on the new rules being established by FSA including the of banning self-certification mortgages, tough affordability, income verification checks and other detailed borrow analysis procedures that lenders would have to carry out under its Mortgage Market Review? If we talk specifically about buy to let, in terms of the way a lender behaves – most operate by looking at rental assessments.  We have used this methodology since we started lending in the buy to let sector and are confident about its ability to provide us with an accurate picture of loan security.  The new criteria being stipulated by the FSA is still very much in consultation stages, and we’ll have to wait and see what the final impacts are.

9) Do you think the new rules will semi-paralyse the industry as is being debated at the moment? We’ll have to wait and see what the new rules are before making any predictions on the impact. However, it seems that the aim is to instil a more meticulous case analysis procedure and ensure that borrowers have the capacity to be able to handle their commitments.  Borrowers should have nothing to worry about as long as the income they provide is correct and can be substantiated.  We’re committed to ensuring any changes balance the long term health of the industry.

10) If rental assessments remain as your main criteria for analysis, what about when occasional volatile movements happen – as has been seen in some local marketplaces in the last few years? We stick to a tried and tested rental calculation and we have a team of professionally trained surveyors who will analyse the figures before we agree to lend.  We have no concerns over this methodology and this has been part of our in-house procedures since we commenced lending in the buy to let sector. It’s a dynamic processes, we’ll continue to make changes as and when they’re necessary.

11) How do you think the balance can be struck between lending that is too expansive (as prior to the credit crunch) versus being highly restrictive (as debatably what is occurring now)? It’s very easy to confuse really stifled criteria with the fact that there is a considerable shortage of funding for lenders themselves.  We as a lender only operate in a very different funding environment to days gone by and, equally, we have a duty to lend responsibly and prudently.  From our perspective, as I mentioned, above we have a considerable market share already so it’s fair to say that we’re doing our bit but, yes, the more lenders that come on to the market, the better.  We are continually reviewing our policy, ensuring we meet evolving market conditions – such as new ways of innovating and keeping the market fresh.  In November, for example, we had a 7 day ‘mortgage sale’ – something we hadn’t done before offering some extremely good products for a limited time period. This was a huge success.  This is just an example of the fact that we want to demonstrate to landlords that there is a desire to lend whilst being mindful of the fact that the market has changed.

12) Do you think there is going to be reluctance on the part of lenders to enter the marketplace in the coming years?  There is a growing confidence amongst the buy to let sector – particularly due to the fact that there is growing demand for rented accommodation which will undoubtedly continue.  Whilst mortgage market criteria in a general level remains tight, more people will look to rent so it is certainly not all doom and gloom for both lenders and landlords.

13) What is your attitude towards new build lending – particularly in light of the ongoing situation of low supply? There’s clearly been a change in this sector of the market and it’s been a tough one.  Buy to let still does not remain reliant on new build but then there is also the fact that new housing is clearly required in the UK.  There has been an over-supply of new build apartments which remains a problem due to low activity levels in the housing market on a general level.  As the market matures again, we’ll keep reviewing our criteria to see if things can change.  We have a specific housing development team at Lloyds Banking Group who play an important part in managing the relationship between Lender and Housing Developer.  This is a role which is expected to expand as confidence in this market segment increases.

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