"What we’ve got at the moment is lenders offering rates that incentivise the high EPC rating, the bigger challenge is what we do with the properties with grades that sit at EPC C and below."
Sponsored by Keystone Property Finance, the panel session was hosted by Brightstar's Rob Jupp and featured a selection of buy-to-let experts including David Whittaker from Keystone, Steve Cox from Fleet Mortgages, Adrian Moloney from OSB Group and Louisa Sedgwick from Hampshire Trust Bank.
The panel discussed a series of questions on green mortgages, swap rates and lending predictions for 2022 and 2023. Here’s their thoughts:
Are green mortgages just a shameless opportunity to increase market share or can they be a genuine force for change and why?
David Whittaker, Keystone (DW): 13 lenders out of the main 30 have some form of green offering, so it’s fairly standard in most lenders’ product mixes. But the issue now is how do you incentivise people to take it and educate the market so that brokers are able to go to their borrowers and say ‘tell me what your EPC rating is, am I able to get you a better price?’ But at the moment we can’t yet reward people adequately for it.
Adrian Moloney, OSB (AM): How many people are actually searching ‘green’, and how many are just searching for the best rate on the market? What we’ve got at the moment is lenders offering rates that incentivise the high EPC rating, the bigger challenge is what we do with the properties with grades that sit at EPC C and below. Most buy-to-lets can remortgage and capital raise for home improvements to make the property energy efficient, and these can be labelled ‘green’, maybe to push the agenda a bit. But it is an agenda that will grow, and I expect most lenders at some point will have some form of green offering.
Steve Cox, Fleet Mortgages (SC): I think products that are out there at the moment aren’t really ’green’, they are just marginally cheaper. At Fleet, only 30% of our volume comes in at EPC A-C. I think a bigger disconnect that we have in the market is for those lenders that securitise and can’t do a further advance. I think green is good, but I don’t think we’ve yet got the capital market that’s going to solve the issue. I think advisers should talk to their landlords now about their portfolio and who they’ve got loans with.
Louisa Sedgwick, Hampshire Trust Bank (LS): 70% of the buy-to-let market has got a worse than C EPC rating so there is an opportunity there. If you look at green mortgages in general, yes they’re a good thing because they will hopefully ultimately improve the housing stock. It is only going to get better and there’s only going to be more products out there. I think the issue we’ve got is when you look at EPCs, they’re not really a great barometer to use, but I do think some of the products being launched are a really positive step.
Are we likely to see some buy-to-let lenders leaving the market this year and if so, what are the implications for mortgage intermediaries?
AM: I use the analogy ‘you can’t sell tenners for a fiver for too long’ and I think that’s a problem for some of the lenders that have found themselves in a little bit of difficulty, so it’s all about pricing. When you look at some of the pricing from non-bank lenders, you wonder how they’re ever going to make those margins and at the moment it’s pretty tough for them. I hope we don’t see them leave the market, but I think it’s going to be tougher for those that don’t have access to retail funding.
LS: I think we might see some lenders decide to close their doors for one reason or another, but it’ll be largely because of the capital markets. I don’t think it’s necessarily mismanagement, if you look at the start of the pandemic, nobody saw that coming. Nobody saw the capital markets closing, nobody saw that a number of the non-bank lenders had their warehouses full. If they can’t securitise that debt on, it’s full so they’ve got no money to lend. So you might find that happens again if the capital markets keep fluctuating and you might just find that one or two lenders haven’t necessarily got their books in order. But do I think we might lose any? I think we might see some being bought.
SC: It’s very difficult, where SWAP rates are priced at the moment, to see how some lenders are selling their product and how that price is going to make any profit, so it’s a challenge for the market as a whole. We don’t want to see people exit, choice is good for the intermediary and the customer, but with the way SWAP rates are priced at the moment, it’s extremely volatile.
Where are SWAP rates likely to fall over the next 3, 6 and 12 months? What advice would you give a client right now regarding product choice?
SC: We’re in a unique period where you’ve got two-year SWAP rates almost becoming more expensive than five-year, and advisers will have seen that in two-year pricing. We’re currently seeing an ‘inverted SWAP rate curve’, so seven-year money is cheaper than five, and that’s never been the case. So what we’re likely to see more long-term products out there in the market. Advisers shouldn’t ignore seven and ten-year products because it’s too long a period. If those products are ignored, what happens in the future if interest rates continue to go up? I think we’ll continue to see some volatility in SWAPs in the coming months, but long term it will settle down.
LS: If you look at what we’re expecting the Bank of England base rate to be this time next year, it’s likely to be 2%, 2.25% maybe, so that’s why two-year SWAPs are so much more expensive than five-year, because the expectation is that it’ll either plateau at 2%, or it’ll start coming down. So the longer-term view of SWAPs is far easier to dictate than it is in the short term. So we’re likely to see a bit of volatility still, but then hopefully it will start to even out.
If you could change one thing about PRS legislation, what would it be and why?
DW: I would ask them to stop is the tomfoolery around cancelling Section 21. If they want to go through with it, they’ve got to bring something back that allows landlords to legitimately sell their properties when they want to or when they simply want to retire. At the moment there’s an agenda to drive that through and just leave Section 8 which means there has to be a fault by the tenant and that is just inequitable for landlords, and it will drive landlords out of the sector, and that isn’t good when you’ve had 30 years of successive governments who have no desire for a social housing policy.
AM: I would like to see some changes to the way in which HMO licenses are issued because the people that come into our business that have to go through the rigmarole of trying to prove they’ve got a license is really painful.
LS: There are 168 different legislations for landlords, so I just want them to simplify those and put them all into one place. I think that would make life easier and I think there’s a good chance that might happen.
Will 2022 and 2023 be vintage years for buy-to-let mortgages? Give me a number for likely market size?
LS: £40bn in 2022 and £38bn in 2023.
SC: UK Finance said it would drop this year to £39-40bn, but I’ll be a bit more bullish than that. We’ve seen the results for Q1 so I’ll say £42bn this year and back to £45bn next year.
AM: Probably not as bullish as that but I think you’re going to have two years of £42bn+, it’s really busy at the moment and a lot of five-year fixes rolling on.
DW: We’re coming down from nearly £46bn last year, which is the highest ever year for the market. I think £41bn for this year and going back up to £43bn next year. It’s going to be a heavy remortgage business because all those transactions written after the changes in October 2016 all went onto five-year mortgages in 2017 and 2018 and they’re landing back in the market now and into next year. It’s going to be a heavy remortgage market; it could go to 75% remortgage.
For more information about Mortgage Adviser Event and the upcoming Manchester date, visit https://mortgageadviserevent.co.uk.
