The Paragon Group of Companies has reported a 12.5 per cent increase in underlying profits over the six months ended 31 March, going from £63.9m to £71.9m.
This was driven by new buy-to-let lending up 84.6 per cent to £823.6m, from £446.2m over the same period last year.
Buy-to-let lending dominated the group’s balance sheet, reflecting the early stages of its diversification strategy, according to the statement.
“A number of regulatory, legislative and fiscal developments have contributed to create uncertainty over the future shape and scale of the buy-to-let market,” it read, noting the stamp duty changes had a temporary disruptive effect on volumes, accelerating completions in the period up to March and consequently reducing pipelines.
In the 2015 Autumn Statement, chancellor George Osborne announced a 3 per cent premium on stamp duty for buy-to-let investors and those buying second homes, aimed at raising £1bn by 2021.
The new measures were introduced on 1 April.
Paragon stated following the introduction of the premium it expects the second half of the year to be slower as a result.
“Furthermore, the regulatory and fiscal changes are expected to result in increasingly complex underwriting requirements which should play to the strengths of specialist lenders, consequently improving their market share and margins,” the results added.
The group tightened its buy-to-let lending criteria in January, increasing the stressed interest rate in its minimum interest coverage ratio test from 5 to 5.35 per cent and embedding forward-looking affordability tests.
This represented an early move towards the 5.5 per cent level proposed in the recent consultation paper issued by the Prudential Regulation Authority and Paragon anticipated similar changes by competitor lenders over the coming months.
The group’s criteria changes led to a depressed level of applications following their introduction which, together with the accelerating effect of the stamp duty changes, resulted in the pipeline at the half year falling to £350.6m, from £701.4m at 31 March 2015.
This reduced pipeline is expected to result in lower completion levels in the second half year, according to the results.
Despite uncertainties in the buy-to-let business, bosses claimed the group remained well placed to operate in the more specialist buy-to-let market that is expected to emerge as a result of recent interventions.
“Further product diversification is scheduled for the second half of the year and the group remains focused on M&A opportunities, particularly in areas that complement existing operations.”
Paragon Bank increased its proportion of new business flows and by the end of March, the bank’s pipeline exceeded that of the Paragon Mortgages division.
Chief executive Nigel Terrington toasted Paragon Bank reporting its maiden profit, in less than two years after launch.
“Whilst there is some uncertainty over the longer term growth prospects in buy-to-let, we expect the tax and regulatory changes to provide relative benefits for the group’s specialist lending focus, in particular, the more complex requirements of professional landlords,” he stated.
peter.walker@ft.com
