BMV Financing gets wake up call

It’s almost been too good to be true over the last few months; we have market leading interest rates in the Buy to Let Mortgage market with rates below 5% and rental calculations of 100% of rental income.

BMV investors using one day closed bridging and same day re-mortgages with Mortgage Express were accessing rates of 5.39% which enabled deals to stack well very well.

BMV investors using different financial methods were accessing even lower rates of 5.07% or lower with rental calculations based on only 110% of pay rate. There were very few deals that I and other BMV mortgage brokers couldn’t get to stack up.

Unfortunately like all good things, this has all come to an end.

LIBOR rates

Although the Bank of England has reduced rates twice in recent months, with another cut expected within the next few weeks, the real cost of borrowing for banks have increase. The rates at which banks lend to each other has increased to record levels in recent months resulting in several buy to let mortgages being pulled.

BMV Market

The BMV industry in general has come under the spotlight over the past few months with several banks imposing stricter criteria on borrowers, particularly those buying at discount. One large building society will no longer offer mortgages if they feel the property in a Sell and Rent Back deal.

There are good reasons why lenders don’t like lending to BMV investors, invariably the investor has put little if any money into the deal. The risks to the investor are lower due to no personal capital being tied into the property making it easier for the investor to “walk away” from non performing properties.

LTV (Loan to Value)

There is a lot of focus on LTV’s being offered to buy to let investors in recent weeks. CHL (Capital Home Loans) recently reduced all its range to a max LTV of 80%, down from 90% last year and 85% this year. CHL then went on to pull all rates this week which will have knock on effects to other lenders.

Several other lenders have also reduced their maximum LTV’s in light of figures suggesting house prices are likely to fall further this year. Lenders are actively seeking to reduce their risks on the UK housing market as property values continue to fall and a number of high profile cases involving Surveyors over valuing in some developments coming to light.

Victims of our own success/greed

There are likely to be several consequences resulting from all our success in the recent BMV buying bonanza. Properties are likely to get more difficult to stack as higher interest rates and stricter criteria will make deals more difficult to work.

One underestimated problem faces Buy to Let and BMV investors looking to remortgage recent purchases. If you purchased your property 2 years ago on a CHL 90% LTV mortgage with high arrangement fees and decreasing property prices, how will you re-finance your investment if 80% LTV becomes the norm?

In my eyes this is more important that any other issue effecting Buy to Let investors as we may all be feeding an extremely difficult period.

The good news

Never one to end on a bad note, there is good news to all this doom and gloom.

Investors were more likely to buy bad investments when rates and rentals were so easy to stack. Properties with little positive cash flow or equity were being purchased due to little or no money down being required. The “nothing to loose” mentality has been strife in recent months without thinking above the underlining question on the value of the investment risk you have taken.

Now investors have little choice but to cherry pick BMV properties with more equity and increased positive cash flow. This will lead to a better long term model reducing the risks of a declining housing market or any spells of vacancy.

On the whole the market has become more difficult to stack but when has making money ever been easy?

There are winners and losers in every market change, losers include Lead Generators unable to sell leads without higher discounts. First time investors will find it more difficult to stack deals on offer (not necessarily a bad thing). Winners include buyers who can get deals to stack in the more difficult market – these investments are likely to yield higher returns along with ease of re-finance over the next few years.

Written by Daniel Morgan

Daniel Morgan is a BMV investors and Specialist BMV Finance Broker.

UK and US property & finance market

The UK and US property & finance market has been talked about greatly over the last few month, by myself included. I would like to point out however that there are several major differences between the UK housing and mortgage market and than of the US, suggesting that the UK should not feel the same house price and credit crises currently faced by the US.

Fixed Rate Mortgages & Stepped Rate Mortgages
There is a conservative tendency in the UK for homeowners to prefer fixed rate mortgages, as opposed to variable rate products on the market, historically due to the consequences many homeowners felt in the 1990's with interest rates above 12%. More importantly there are few independent mortgage brokers I know of who recommend mortgage products with stepped rates*. Stepped rate mortgages are rare in UK with little popularity due to several factors;

(i) - Rates tend to be extremely low to begin, usually around 3%.
(ii) - Rates will generally increase once per year of around 1% - 2%
(iii) - Homeowners will be fixed for generally 3 - 5 years at which point the interest rate is well above other competitor rates
(iv) - Stepped rates tend to carry severe redemption penalties**
(v) - The interest rates tend to be variable which means calculating what your payments will be in 3 years time near impossible.

These factors have led me to shy away from recommending such products, the product providers have a good concept, create a mortgage for people who are on low incomes to buy their own home and as household income historically increases over time clients will be able to afford higher monthly payments. On paper it makes sense but in reality, as we are now seeing in the US, homeowners simply don't appreciate or think about how they plan to pay for next year or the year after.

Federal Reserve and FSA
The UK's FSA have far more sweeping powers and controls compared to the US self regulated style system, although the self regulated system can have great benefits to competition, marketing flexible lending criteria this can have devastating effects when things go wrong.
The FSA done great work in ensuring customers are treated fairly along with brokers & lenders being accountable for their advice and services.

The US Sub prime & UK Adverse Credit Market
Going back to the earlier factor on fixed rate mortgages and stepped rate products, due to supply and affordability US mortgage brokers have offered sum prime clients, generally classified as higher risk, a high risk product. In the UK clients with Adverse Credit who are also classified as high risk will be offered several options with the fixed rate being favorable due to the monthly payments remaining the same.

The major problem currently facing the UK mortgage market is money or rather lack of it.
Take northern rock as a prime example, traditionally Northern Rock doesn't lend to clients with adverse credit. On their high LTV products the credit check is of high importance, however they have still found them selves the victim of the current money market.
Although house prices may stay stable in the UK along with few missed mortgage payments, we still have to tackle the issue to bringing new money into the market at a lower cost.
Hopefully the new year will bring a new LIBOR rate***.


Daniel Morgan
Mortgage Broker & Finance Journalist

* A mortgage product which increases interest rates over a specified period
** Penalty fees for redeeming the mortgage before an agreed date.
*** Interest rate at which banks lend to each other

End of Adverse credit mortgages?

Adverse credit mortgages are coming under increasing scrutiny since the recent credit crunch which has effected the current liquidity markets on both sides of the continent.
An adverse credit mortgage is a mortgage product designed to aid people who have had problems with credit is the past, the lending criteria varied from allowing one or two missed payments to lending money to bankrupts and repossession cases.

They would invariably have high interest rates and lend on a low LTV, loan to value, of the property which ensured high profits for the lender along with security on the property.
Unfortunately clients started having difficulty keeping up with the monthly payments, especially since rates rose in total 1% last year. Even with the recent interest rate cut there are ever more cases in both the US and UK of homeowners being unable to maintain the payments.

What happens when adverse credit mortgage holders want to remortgage?
Last month Kensington, the specialist adverse credit lender, pulled out of the market.
For clients coming off fixed rate mortgage deals onto the SVR, Standard Variable Rate, we may see even more homeowners facing repossession due to higher monthly payments.
Its put the whole industry in a catch 22. One the one hand adverse credit lenders need to tighten their criteria to ensure future borrowers are of lower risk. One the other hand homeowners coming off fixed rate mortgages may find it difficult to find an adverse credit lender prepared to take on the old terms.

Does this mean the end of adverse credit mortgages?
Whist there must be a re-evaluation of the lending criteria used by the likes of Kensigton we must also remember that stopping the money is not going to solve the problem, as we can already wittiness with the current LIBOR rate at an all time high and the effect this is having on lenders such as Northern Rock.

ECB to offer unlimited funds to banks at fixed rate

The ECB, European Central Bank, today stated it would offer unlimited funds to European banks at a fixed rate in the hope of encouraging banks to start lending to each other again.

What effect does this have on the UK?
It could possibly reduce the LIBOR rate which is currently at an all time high due to the limited supply of lenders willing to lend out their money. Most are keeping hold of their cash due to possible liquidity problems in the future.
If the funds can reduce the LIBOR rate it would make it easier, if not cheaper, for banks such as Norther Rock to borrow money to lend to its customers.
It will not solve the issue of the sub prime market but will ease the consequences the sub prime and adverse lenders have had on the market in general. It is still too early to tell if a reduced libor rate will help or hinder the current situation.
It all now lies with European banks to take up the fixed rate offers and start to lend to each other again.

How does this effect my Mortgage?
Well if you were looking for a fixed rate mortgage a few weeks back with a high LTV, the majority of the lenders were sourcing their finances from the LIBOR market. Now if the LIBOR rates falls due to more money being freely available you could see one of two things happening in the UK mortgage industry;

(i) Mortgage lenders make more profit.

(ii) Mortgage lenders pass on the savings to Mortgage borrowers in reduced interest rates.

With the number of mortgages available on the market I would predict more lenders leaning towards the 2nd option due to increased competition and vigilance from mortgage brokers who give independent advice.
If you use a good Independent Mortgage Broker he should be able to conduct a mortgage search for cheap mortgage with lower interest rates.

Daniel Morgan
FruitMortgages.com
Mortgage Broker Search

Interest rate drop to 5.5%

Interest rates dropped to 5.5% last week which was a welcome from most of the finance industry. Mortgage brokers, Lenders & Borrowers have all been sensitive to the market in the last 6-8 weeks due to a slow down, if not fall, in house prices and a high LIBOR rate which has made it difficult to source money on the open market. Although the LIBOR rate is still high compared to 3 months ago we are all hoping the drop in the Bank of England base rate will encourage Lenders to lower their interbank rate.
The obvious advantage to home owners is that many on a variable, tracker or discount rate will see their monthly payments reduce over the next few weeks. HBOS, owners of HALIFAX, and Nationwide were both the first to announce it had reduced its interest rates on their tracker and variable products.
However hopes of a change in the current housing market would be possibly over optimistic, a 1/4% change in interest rates save or cost around £40 a month on the average home. There is likely to be a re-index in the British housing market before anyone will see an increase in house sales. January and February should be extremely trying times for the UK.
The only market I can foresee growing will be the Bridging Loan and Discount Property Purchases market as they move in to purchase property from Distressed Sellers, people who cannot sell their home on the open market.
Not to be one for doom and gloom: The only thing to fear is fear itself. The market has a funny way of correcting itself and although it is likely house prices may fall in the near futurem, there is no real concern of a return to the 90's.
Enjoy your Christmas,
Daniel Morgan
Independent Mortgage Broker
FruitMortgages.com