BY: Doug Hall, Director, 3mc

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Specialist lending is a term that means different things to different people, so for clarification this column will seek to address issues relating to most types of lending other than mainstream residential and buy-to-let mortgage lending. Adverse lending in both the residential and buy-to-let markets, specialist mortgages for the self-employed and those with unusual income streams, and loans for investment property, HMOs, multi-units and expats are all subjects that will all be covered over the coming months.

There are new developments taking place in the residential market. I have been particularly interested in the way in which affordability tests are now being applied by some lenders in the residential market, which is similar to the approach that has been adopted in the specialist buy-to-let market.

Let me explain what I mean. Brokers are well aware that when it comes to buy-to-let mortgages, lenders need to apply the new PRA stress test that says a notional rate of 5.5% must be used for assessing affordability, to ensure that borrowers can cope with future rises in interest rates.

However, if a deal is based on as 5-year fixed rate or longer, then this notional rate doesn’t apply and the stress test can be carried out using the pay rate, meaning that the borrower can borrow more. Until recently, few lenders carried this approach across into the residential market, but we’re now starting to see the same approach happening more frequently.

The difference to the amount that can be borrowed can be significant. Take, for example, the following deal based on a single applicant earning £50,000 a year with no dependent children, who is purchasing a house using Dudley Building Society’s 5-yr 2.89% fix available exclusively via 3mc. When stress tested at the pay rate a maximum loan of £295,000 is achievable, which is £65,000 more than a very similar deal based on Dudley BS’s 2.89% 3-yr discount, which enables a loan of just £230,000 when stress tested using a notional rate.

Knowing which specialist lenders are able help borrowers with non-standard requirements is important for all brokers, but if a broker only deals with specialist cases on an occasional basis, it can be difficult keeping abreast of what each lender has to offer. So here’s a brief summary of what’s currently on offer:

Pepper Homeloans – is offering new 2-year fixed rates (but for 30 months) with rates starting from just 2.93%. Pepper doesn’t credit score and offers both residential and BTL deals for borrowers with an impaired credit record (including the recently self-employed).

Magellan Homeloans – has launched two new product ranges and has reduced its fixed rate pricing by up to 0.5%, with rates starting from 3.10%. Magellan specialises in helping borrowers rejected by high street lenders and they will accept arrears, CCJs, defaults, IVAs and bankruptcy, providing they have maintained a clean credit record during the past 12 months.

Dudley Building Society – has recently made a number of enhancements to its lending criteria, including positive changes to income requirements and credit history. Dudley BS has no maximum end of term age for both residential and buy-to-let borrowers.

Aldermore – has reduced rates on many of its owner occupied products and launched new high LTV mortgages (up to 95%) for clients with low deposits, which replace the recently closed Help to Buy mortgage guarantee scheme.

Precise Mortgages – has adopted basic, higher, additional, limited company and bespoke income coverage ratio tests, which range from 125% to 160%. Precise Mortgages provides tailored ICR’s dependent upon an individual’s circumstances.

Axis Bank – is taking a pragmatic approach to the new PRA underwriting requirements. ICR’s start from 125% with 5-year fixed rates at pay rate from 3.95% with only a 3-year ERC period.

Kensington – During the last quarter of 2016 Kensington launched into the HMO market and is also offering multiple units on one title, via its specialist distributor range.

Paragon Mortgages – has introduced new minimum affordability tests, based on the applicant’s tax status, with limited companies starting from 125% @ 4%. During 2016 Paragon Mortgages also launched their Premier Range which is available through a limited number of distributors.

The new PRA rules for buy-to-let underwriting will create opportunities for intermediaries as there are now considerably more factors for investors to take into consideration when contemplating how best to finance the acquisition of additional property. In the residential market there are also more products coming on-stream for individuals with specialist requirements and many borrowers will be unaware of their availability.

Despite talk of a tougher year ahead, 2017 is going to bring plenty of opportunities for mortgage intermediaries.

* Rates correct as at 06/01/17. **Lender arrangement fee only. Other fees may apply