Directors' report
Business review - Our strategy
Buy-to-let, self-cert and other specialist markets
Buy-to-let
Product overview
Buy-to-let loans are no different from other residential mortgages in the sense that they are fully secured on residential property. However, the income required to cover mortgage payments is derived from the rent generated by the property rather than the borrower's salary or private income.
Buy-to-let offers customers an opportunity to make a leveraged investment in property. Typically the mortgage can be up to 85% of the value of the property and rental income is required to exceed mortgage payments (usually by 25%).
For lenders, buy-to-let offers superior risk-adjusted returns. There is a margin premium over standard residential mortgages; arrears rates and losses are broadly comparable.
Drivers of demand
There is considerable room for further growth with increasing demand for rented accommodation and the attractiveness of buy-to-let as an effective means of financing investment in rental property. We conduct regular surveys of buy-to-let landlords and in October 2007 a high proportion (86%) intended to increase or maintain their investment in rental property.
Market and competition
Mortgage Express, our intermediary lending business, was a pioneer of the buy-to-let product in the UK and now, over a decade later, we are still the leading buy-to-let lender in the UK.
There has been substantial growth in the UK's buy-to-let market, particularly over the last five years. At the end of 2007, there were over 1 million buy-to-let loans outstanding, worth around £120bn, representing just over 10% of the total mortgages in the UK.
Self-cert
Product overview
Self-cert mortgages are designed to meet the needs of customers who do not have a conventional, single source of income required on a standard mortgage application. This may be because they are self-employed, have irregular, commission-based income or multiple sources of income. Although we still require self-cert applicants to state their income and carry out a standard affordability assessment, our underwriting relies more heavily on the credit search and other forms of automated checking. As part of this process a sense check is carried out in order to ensure that the stated income is consistent with the applicant's age, occupation, location and time in employment (or self-employment). Self-cert lending is higher risk than standard lending, however the combination of rigorous underwriting and premium pricing ensures that risk-adjusted returns are better than those available in the standard market.
Drivers of demand
The foundations remain strong. Growth in the self-cert market in the UK has been driven by changing working patterns with increasing numbers of people going into business for themselves - there are now four million self-employed in the UK. We have also seen considerable growth amongst employed applicants who have additional income from a second job or investment and want to include this income in their main mortgage application. This type of mortgage is becoming more commonplace due to changes in working patterns and earnings.
Market and competition
The self-cert market has become increasingly sophisticated in the last two years and there are now broad ranges of products catering for the specific needs of these customers. In particular, the advent of regulation has increased confidence in the processes surrounding the sale of self-cert mortgages which has led to growth both in terms of lenders offering self-cert and intermediaries distributing the product. As the product becomes more mainstream, we expect to see increasingly innovative solutions designed to address the specific needs of these customers. Although a number of new lenders have entered the self-cert market over the last two years, their impact on the market has been limited.
Other specialist markets
The UK residential mortgage market is becoming increasingly diverse. Consumers have a growing range of specialist needs, which are not satisfied by the traditional mortgage offering.
Previously accepted views of house purchasers, and what they need from their mortgages, are changing. Young people and first-time buyers are turning to a variety of new options to establish themselves in a home, such as, seeking help from family or pooling their financial resources with friends. Equally, sectors of the market such as remortgagers and home movers can no longer be viewed as homogeneous groups served by 'one size fits all' solutions, meaning that advice and innovative product solutions are becoming more important.
Changes in society are generating opportunities to develop unique product propositions. There is a continuing trend towards one-person households and a large number of house transactions result from some form of relationship breakdown. In addition, an increasing number of people are coming to the UK to work or study. Many want to buy a property here, as a permanent base or as an investment. Many people also see the equity in their property as part of their retirement provision. Furthermore Bradford & Bingley research suggests that 58% of retired people would prefer to stay in their home, which is leading to an increased focus on equity release mortgages.
With our existing skills and infrastructure, Bradford & Bingley is well placed to take advantage of these trends. We have mortgages for niche markets including our Lifetime (equity release) mortgage range.
