Why are LTVs dropping and rates rising in such a low interest rate environment?
Paul Brett is managing director – intermediaries at Landbay
As soon as there was a whiff of COVID-19 in the air on the British Isles, the Bank of England lowered interest to the lowest rate in the Bank’s history.
With Bank Base rate now standing at a record 0.1% you may ask why it is that some rates, particularly for products such as buy-to-let, have not dropped accordingly – or even gone up?
It comes down to a matter of funding. Mainstream banks are funded by retail deposits, savings and investments – and also by access to cheap money via the government’s Term Funding Scheme (TFS).
Non-bank lenders, such as most buy-to-let lenders, get their money from the wholesale money markets. Some of this may be from larger banks, other times it will be from the capital markets such as pension and ISA funds.
With the potential drop in house prices caused by the lockdown, as well as the need to deliver payment holidays to landlords, this has made buy-to-let a riskier proposition for investors, which resulted in the cost of funds immediately being more expensive.
Funders, of course, need to know that their money is safe and that any money that they lend, will receive a commensurate risk based return. As soon as uncertainty hit the market the cost of funds increased as the risk became higher, which meant that rates went up.
With the government banning all house moves, the housing market ground to a halt leading to the prospect of house price falls.
At the moment market speculators continue to predict anything from a 3% fall in property prices up to as much as 30%.
With an outlook that meant that houses may therefore be worth less in a few months, it was not prudent for lenders to continue lending at the same loan-to-values.
It is clear to see that if lenders lent at an LTV of 75% or 80% and house prices do drop by 30% then those properties will be in negative equity.
This led to LTVs being dropped to about 60% pretty much across the board. What this did is give lenders scope, so that if they did have to repossess a property through non-payment of the mortgage, there would still be some equity left in the property when it came to selling it.
The positive is that since physical valuations are once again permitted, demand for buy-to-let properties – in fact all properties – has soared again.
While demand is nowhere near what it was back in January and February this year, it has brought renewed confidence. This has led to funders coming back into the market, prepared to lend both to higher LTVs and on properties such as houses in multiple occupation (HMOs) and multi-unit freehold blocks (MUFBs), all of which Landbay will lend on. It has also led to lower buy-to-let interest rates once again.
While it is hard to forecast what will happen at the end of the payment holiday periods and how many landlords will continue paying the higher mortgage rates that will then be due if they took the payment deferment, or how many will default.
Ultimately, if there is the demand for property and therefore the ability to sell it, it does mean that these properties can be sold if need be, bringing renewed confidence to both lenders and their funders.