19 minute read
Round table: Challenging changing – and robust
Challenging, changing – and robust
Jake Carter delves into Mortgage Introducer’s latest roundtable discussion, which looked at the current buy-to-let landscape, average tenancies, and issues within the market
The buy-to-let industry has undergone many changes in recent times, with increased regulation and alterations forced by market conditions and the pandemic.
Borrowers have increasingly looked to diversify their portfolios and attract higher yields; however, they have, in turn, incurred changing demands from tenants.
The market can only cater to so many niches, so Mortgage Introducer, in association with Aldermore Bank, asked experts from United Trust Bank, LendInvest, CHL Mortgages, Market Financial Solutions, and Aldermore Bank itself about what is next for the industry.
ASSESSING THE CURRENT BTL MARKET
Steve Hewitt, national key account manager at Aldermore Bank, emphasised that when you assess the current buy-to-let landscape, you have to look back over the last 10 to 12 years to gain a full understanding of the picture.
Hewitt said that as much as the buy-to-let market had been affected by tax changes, stamp duty, and various other developments, one of the biggest issues in the sector remains on the horizon.
“I think the biggest thing coming out of the conversations we are having this year is around EPC ratings,” he said. “We know, from a government perspective, they are going through this consultation period at the moment in terms of the changes for EPC due in 2025, and we will have to wait for the final outcomes to be announced.”
There are challenges for brokers, too, he said, because the full facts are not yet available, making it harder to offer comprehensive advice.
“We are just trying to understand the best way to be able to handle those changes that are coming down the track,” he said. He believes that providing the right education on EPC is the responsibility of everyone in the industry – lenders and brokers alike.
Michael Cook, chief mortgage officer at Market Financial Solutions, pointed to the levelling-up agenda as an area that is having a big impact on the buy-tolet industry.
“Landlords are getting whacked from everywhere, and I think you can believe the Telegraph headline ... that Michael Gove has pretty much declared war on buy-to-let landlords,” he added.
Touching on opportunities within the market, Cook said with many now returning to officespost-COVID, he believes landlords can profit from city location rental properties.
Meanwhile, Andy Virgo, buy-to-let sales director at LendInvest, pointed out that the market has proven to be robust despite challenges.
“There is a tremendous amount of opportunity for brokers and for lenders when it comes to those borrowers coming off the five-year fixed rates that are maturing following the PRA changes back in 2017,” he said.
“We are funded differently from lender to lender and some of us are in a different position from others. I think we are all going to arrive at the same place eventually when it comes to the interest rates we charge. However, the cost of funds and the significant pipelines that we have – that is a challenge for lenders, brokers, and clients alike.”
Barry Luhmann, head of buy-to-let mortgages at United Trust Bank, outlined that, from his experience so far this year, it had been very busy in the market.
“Increasing rates are going to make it a very different
year from what we have seen in probably the last 10 or 12 years,” he said.
“I am expecting a lot of remortgage activity on the back of the five-year fixed rates concluding, as well as from borrowers trying to lock in a long-term rate.”
Andy Valvona, national account manager at CHL Mortgages, concurred with Luhmann and added that when any industry is faced with a challenge, it is about getting your head around it and understanding the situation thoroughly.
“Products are being withdrawn very quickly, so brokers who are transacting business, particularly with portfolio landlords, are finding it very tough to recommend the product and then actually get everything they need together to be able to submit a mortgage application,” he said.
“So I think that is the biggest issue on brokers’ minds at the moment [whom] I have spoken to – and of course, they are all asking for more time before products are withdrawn by a lender,” he added.
He went on to say that lenders within the buyto-let space need to figure out what they can do to make things easier for the brokers and, in turn, their customers.
ISSUES WITHIN BTL MARKET
Looking to what issues buy-to-let clients have been raising with brokers and how they have been addressed, Virgo said landlords are facing two main problems.
“The primary one is the cost-of-living and how the pressure is being applied to tenants and their ability to pay rent,” he said.
“There has been an increase in less than tier-one applicants, and so there is a need for us to look at our lending products and make sure we cater for those landlords that have a misdemeanour in the background but ultimately are the ones who are paying their mortgages.”
Moving on to the second core issue, Virgo explained that there is a need for longer-term certainty due to the cost-of-living situation, and he believes seven- and 10-year fixes could help resolve this.
Luhmann had a slightly different take on the issues “Any property coming to market right now is being snapped up very quickly, even given the price increase and cost-of-living crisis” STEVE HEWITT
affecting the market right now and said that, from the perspective of a new lender, he had encountered many unusual cases coming through the door and each needed an individual solution. He added that many customers are coming to lenders after having been declined for a mortgage and are asking whether there is any possible solution.
“We know this is a very busy market,” he said. “There are lots of specialist lenders in this space, but we are finding quite a niche in just being very flexible on property.”
“I think the issues that are being raised right now are mainly short-term problems,” Valvona added.
He said he had seen many clients not wanting to lock into a fixed-term mortgage for longer periods, despite the rising Bank of England base rate.
“If clients do need to raise some money in a couple of years’ time, it may take three years to carry out the improvements to the property from an EPC perspective; I think there may be some clients who are taking a view that they do not want to fix for that long,” he said.
He also reiterated the earlier point about broker education.
“I believe we do have a lot of education requirements in the market,” he said. “It is quite interesting, really, that some brokers are very clued up on buy-to-let and some are not.”
Valvona also returned to EPC ratings as a key issue – particularly from the perspective of landlords →
Specialist mortgages with more ‘yes’
We see the real person behind every application. And if there’s a way to make it happen, we’ll find it.
Find out more at
intermediaries.aldermore.co.uk
FOR INTERMEDIARY USE ONLY
having to invest in their properties in order to improve their ratings to a C.
“Landlords are like the rest of us and are likely to leave these improvements until the last minute,” he said. “A good, well-informed broker will be reminding them of exactly what they need to do.”
Meanwhile, for Hewitt the main focus is just how busy the market has been.
“I think one thing that we have seen over the last number of months now is we have gotten busier, busier, and busier,” Hewitt says.
He went on to add that it had been relentless in terms of the level of business that had been coming through.
“It may not necessarily be reflected in terms of the service from the lender, but conveyancing is one of the areas in which I have seen a lot of questions and queries for solicitors to answer regarding how quickly clients can get their property completed,” Hewitt added.
From a conveyancing perspective, Hewitt believes that if everyone involved within the process knows what they are up against in terms of the timescales, then it becomes much easier for a deal to progress.
“Service is one of the critical things, especially when you are trying to get things done very, very quickly, and a lot of the time there are tight time constraints, so it is important that the deal progress smoothly,” Hewitt said.
“The other thing that we have seen is that tenants are looking at the cost-of-living crisis, and therefore want properties that are more energy efficient, as they will pay less in bills.”
Hewitt believes people are questioning how much they should spend on a property to improve its energy efficiency. As such, it is important to try to understand where the market is going to be in a few years’ time. He believes that more energy-efficient properties will always move faster, now and in future.
Cook said that a lot of clients at Market Financial Solutions are high net worth and have an array of weird and wacky requirements, and he added that all the professional property developers believe service comes up as a key issue time and time again.
“It is amazing how many horror stories you still hear ... on turnaround times,” he added.
“You have now got the changes coming in related to EPC ratings, which have been a big dominator this year.
“However, the government has also reformed a new deal for tenants in Scotland, and there is legislation coming in in Wales that changes tenancies completely, with landlords now having to take a test, essentially, to get a qualification to be a landlord.”
As such, he said that Wales had seen one of the biggest exits of landlords in the UK, which he believes is a worry, with a similar pattern beginning to develop in Northern Ireland as well.
Virgo, meanwhile, noted on the EPC issue that many lenders have EPC-related products that reward landlords for selecting the right type of property. On the flip side, however, the challenge some lenders are going to face is how they can help existing borrowers who require further advances to do work on their properties.
“If you look at some publications, they talk about the average cost being circa £10,000 to get your EPC rating up,” he said. “That is all well and good if you have got a property in London and the South East; you could remortgage and you are easily going to be able to raise an extra £10,000 worth of equity or slightly more to get the work done.
“However, what about those properties in Wales and the North East and North West – are those going to have enough equity to raise an extra £10,000 or justify spending £10,000 on a property?”
Hewitt added, “Buy-to-let landlords will have to deal
Specialist mortgages with more ‘yes’
We’re here for first time landlords to companies looking to grow their por olio business.
Get in touch to see how we could help.
intermediaries.aldermore.co.uk
“It is amazing how many horror stories you still hear that brokers are having from lenders on turnaround times” MICHAEL COOK
with this over the coming years, whether they look to re-evaluate their portfolio, [or]vsell it off and take the equity out of that and then reinvest that money back into a newer property that fits within the EPC standards; or do they do the work to the property?”
He explained that properties in the north of England may only be worth £60,000, £70,000 or £80,000, so doing £10,000 worth of work may not actually add £10,000 worth of value to the property.
TENANCY LENGTHS
Recent industry analysis suggests that the average tenancy now stands at 23 months, a significant increase.
“There are various schools of thought on this. If a landlord is looking for surety of tenancy, then the longer a tenant is in there, the better, because one thing that landlords do not like is having a rental void to deal with,” said Valvona.
“On the other side of the coin, though, if you have got a quick turnaround in tenants, you are able to adjust your rental more easily depending on what your costs are – and in a rising interest-rate environment, that is quite important.”
According to Cook, there is a rush from landlords to offer all-inclusive deals; however, he believes that increases in energy bills may make such contracts rare in future.
“At the moment rents keep rising and rising and rising; you could almost agree a stepped increment at the start,” he said. “But then some tenants would probably reject that, although even the longer-term tenancies will likely be charging a bit more if the market rents go up.
“From a lender’s perspective, it is not a bad thing to have a long tenancy – you just need to make sure it has got the correct exit clauses.”
Cook said that more and more lenders are interested in reviewing the terms of the tenancy as part of the initial underwriting.
“The lengthening of a tenancy stay is great. The challenge is the cost of living and the cost of fuel at the moment, what with gas, electricity, and food continuing to rise in price,” said Virgo.
“We have just come out of the best part of two-and a-bit years of issues with COVID and lockdowns, and people’s needs are different now from what they were with the increase in people working from home or hybrid working,” added Hewitt.
He explained that he had seen people increasingly wanting to stay in the same place for longer periods.
Luhmann concurred with his colleagues and added that he believes it is important for a tenant to have surety of their residency and that, ultimately, that is also good for the landlord.
“I understand the perspective of shorter tenancy and being able to adjust rental prices more accurately, but this is the price you pay for a surety of tenancy,” he added.
He explained that as a landlord, you do need to manage rents correctly, but that there is a middle ground that is beneficial for all parties involved.
SUPPLY AND DEMAND
There is a significant disparity between supply and demand. With limited properties available and an increase in new tenants registered at branches, Luhmann said the best way to resolve the issue is to build more properties.
“There is a supply and demand imbalance because not enough homes are being built at the moment, and the best way to rectify this is to build more properties,” he noted. He went on to add that it is also about →
Specialist mortgages with more ‘yes’
We’re not put o by the quirks and complexities. Even if your client has credit complexities. Even if your client has credit blips, we may still be able to help.
intermediaries.aldermore.co.uk
FOR INTERMEDIARY USE ONLY
converting existing buildings from commercial to residential and adapting property on the high street.
Hewitt agreed with Luhmann that converting old buildings is a good way to narrow the gap between supply and demand.
“Any property coming to market right now is being snapped up very quickly, even given the price increase and cost-of-living crisis,” he said.
“I think the answer is to build more properties, but it is about it being the right properties and in the right location. We have seen a lot of building over the last 10 years in terms of apartments, and the city life is something that is starting to slowly feed back into demand.”
According to Cook, property investors have been buying office blocks with the intention of converting them, but he explained that it comes down to desirability – the properties have got to look good for people to want them.
“They have got to look good, feel good, sound good – and they cannot be cramped or still resemble an office building,” he added. He believes that it is down to the private rented sector to take it on itself to improve properties to a good standard.
Meanwhile, Valvona believes that the answer to balancing supply and demand is a political question and not one for lenders and brokers.
“We have seen the demise of the Help to Buy scheme, which has meant fewer people are able to buy properties and therefore more people want to rent,” he said.
Valvona believes, facilities are needed to help people develop properties, whether on a light-refurb or heavy-refurb basis. Funding for developers – and how to provide this – is also an essential part of the mix. He has seen this topic debated many times by industry experts, and there is no one clear-cut answer.
“COVID has meant tomorrow’s tenants are still on the verge of making the move out from their home, or from whatever property they were stuck in, so that rush of tenants coming to the market has returned now that they have managed to save some extra cash for a deposit,” Virgo said. “I am expecting a lot of remortgage activity on the back of the five-year fixed rates concluding, as well as from borrowers trying to lock in a long-term rate now” BARRY LUHMANN
GREATEST BROKER MISTAKES
When looking to the greatest mistakes made by brokers when discussing buy-to-let mortgages with their clients, Cook points to tax advice or the lack thereof. In addition, he mentioned limited company issues and the supply for this type of mortgage as an area in which brokers often make mistakes.
Valvona agreed with Cook that taxation advice is a regular error, with brokers often misinformed after being drawn into a conversation by their clients. He explained that brokers will often recommend a taxation specialist to their clients, but in some cases, customers push their brokers for tips on tax that can, ultimately, be incorrect.
“I think if we are honest, we have all had those conversations with brokers in which they have strayed into advice without really realising it,” he said.
“The second mistake I think brokers are making is recommending a five-year fixed rate or even a seven-year fixed to a client on a property that has a low EPC rating without adequately going into the client’s responsibilities in bringing it up to a C.”
Luhmann explained that as far as he has seen, landlords have been coming to lenders with low-rated EPC properties.
He believes that education is key and explained that brokers need to inform their clients of the potentially imminent government changes.
“I think there is a lack of care, a lack of education,
Specialist mortgages with more ‘yes’
We see the real person behind every application. And if there’s a way to make it happen, we’ll find it.
Find out more at
intermediaries.aldermore.co.uk
FOR INTERMEDIARY USE ONLY
people not reading the guides, or talking to the BDMs – whatever they are doing or not doing is wasting their time,” he added.
Virgo believes that the top challenge brokers are faced with is keeping up to date with what is happening in the market. He said there is so much complexity out there now that just relying on sourcing systems for the cheapest rate is not the way to go.
“Going for the cheapest prices is doing a disservice to the customer in not necessarily pitching them in with the right lender,” he said.
“According to Hamptons, in 2021 there were 47,400 new limited-company SPVs set up in the UK for property, and that is 14 per cent up from 2020 and double the number of SPVs that were around in 2007,” he added.
Virgo said this demonstrates the market is becoming more complex and lenders need to be able to deal with the complicated structures that exist, such as limited companies.
Hewitt, meanwhile, looked back on Valvona’s and Virgo’s points and added that he believes education is incredibly important – and even more so with the market continuing to become more complex. He noted he had seen applications coming to lenders when they had not followed the correct structure, which slowed down the process and added further unnecessary hurdles.
TIPS FOR BROKERS
Hewitt said the best thing brokers could do is take advantage of the free resources available to them, with
“Landlords ... are likely to leave [EPC] improvements until the last minute.... A good, well-informed broker will be reminding them of exactly what they need to do” ANDY VALVONA
many companies and operating systems in place to assist their transactions.
“We are a free resource – anywhere else in the industry and in any other industry you would have to pay for the training,” he added.
Cook went on to say that there are many changes coming down the road for brokers with which they will need to be familiar, which will in turn help them provide a suitable level of service to their clients.
“Setting up an SPV correctly in the first place, before it is registered at Companies House, is essential because you cannot change it later,” he noted as an example.
Cook gave an example of his own – noting that if you do not get the inheritance tax-planning right when you set it up, you cannot change it later because the lender will not let you, so there could be a drastic negative impact from this if it is done incorrectly.
Virgo, meanwhile, believes it is important for brokers to reach out to their portfolio landlords and talk about their five-year-fixed opportunities and the upcoming EPC changes.
“Stay abreast of the changes that are coming down the road and educate yourself and educate your clients,” he added.
Luhmann also believes that keeping informed and improving education standards, and therefore the education of clients, is the best approach for brokers.
Valvona added that brokers should also be reaching out to their BDMs and using them as a resource.
“You have got to stay up to date with what is going on in your area and other areas. If you have got a client who has a portfolio landlord that is looking to buy properties in the opposite end of the country, you need to do some research on what is going on in that particular area as well,” he said.
Valvona explained that a simple conversation between brokers and the other moving parts within the process can help to resolve many issues that arise during a transaction, and he believes education is the key to addressing this. So while EPC perhaps remains the biggest talking point in the market, it is the three Es that really matter: education, education, education.
Specialist mortgages with more ‘yes’
We’re here for first time landlords to companies looking to grow their por olio business.
Get in touch to see how we could help.
