Effects of the Credit Crunch on UK Buy to Let Mortgages
by: Michael Aglony
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One year on from the onset of the credit crunch the UK housing market is still adjusting to the limited supply of mortgages for both owner occupiers and residential landlords.
The impact now stretches beyond borrowers and lenders to the house building sector with Taylor Wimpey announcing on 27 August a 96% fall in pre-tax profits and exceptional items of a further £1.5Bn.
Effectively the development of sites has almost ceased as builders concentrate on selling existing stock before developing subsequent phases. Whilst house prices have eased, there are not sufficiently large volumes of properties being sold to suggest a collapse of the broader market.
Confidence in the first time buyer market has suffered as buy to let mortgages at or above 100% of the purchase price have disappeared and these borrowers now need to raise a deposit which will take time to accumulate. When coupled with higher lending margins, the decision to purchase that first home on the property ladder has meant that more people will rent property in 2008. This should have been good news for landlords.
Good rental growth across the UK can be found in the latest RICS Lettings Survey and in Paragon's Buy To Let Index which gives average growth last year of 9.3%.
Landlords hoping to buy property off higher yields and therefore expecting to be able to finance to 85% of the property value have also faced a reduced supply of funds with a higher pricing margin effectively reducing the available mortgages. This is evidenced in the Q2 2008 BTL lending data issued by The Council of Mortgage Lenders (CML) with an 18% reduction in the number of loans in the first 6 months of the year against a wider market decrease of 28%. However the strength of many landlords cashflow has allowed them to continue to be active purchasers and there is a general belief that this group in particular is well positioned to absorb distressed property sales that may "feed through" in the latter part of the year.
Lenders have significantly tightened their credit criteria throughout the year and margins moved out significantly as they struggled early in the year to manage application levels caused by the loss of market capacity when lenders dependent on securitisation were forced to stop lending. As SWAP rates have eased through July and August lenders have also reduced prices to bring themselves back into active lending and tiered pricing according to risk (principally based on loan to value) has seen pricing as low as 5.09% for a 2 year fix at 60% loan to value. Higher pricing is still applied by those lenders still willing to lend to 85% but with increasing dependency on retail deposits to fund new lending the cost is reflected with rates more in the range 6.5% to 7.5%.
The recently released CML figures look relatively benign with only 1.1% of loans in arrears over 90 days compared to the broader market figure of 1.33% but still up from 0.73% at the end of 2007. Any significant deterioration would cause lenders to re-trench further at a time when BTL landlords are probably the best hope for the property market - absorbing the CML predicted 28,000 repossessions in the second half of the year.
The greatest concern for both owner occupiers and landlords is whether the Government will overhaul Stamp Duty in the November pre-budget statement. Whilst many BTL properties are below the threshold of Stamp Duty, the sale of many such properties may be held up as buyers moving up the property ladder await any reduction in Stamp Duty on higher value properties. The potential damage of yet another Government blunder to a fragile level of confidence should not be over estimated.
About the Author
Micheal Algony writes on behalf of http://www.mortgagesforbusiness.co.uk who supply buy to let mortgages
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