Specialist Finance Introducer Focus on the buy-to-let specialist market

A squeezed market will see specialist lending shine

Richard Rowntree

MD, mortgages, Paragon Bank

As we come to the end of another tumultuous year, it’s fitting that Collins Dictionary has deemed “permacrisis” to be the word of 2022. The term means an extended period of instability and insecurity, especially one resulting from a series of catastrophic events.

Permacrisis seems to have defined the first three years of this decade, and perhaps applies even as far back as the Brexit vote of 2016 – but as a mortgage industry, we have a proven ability to adapt, innovate, and survive. Buy-to-let, for example, has been written off many times in this period, as it had been going back to its formation in the mid-’90s.

The mini budget debacle and subsequent increase in interest rates prompted much media debate over whether buy-to-let remains viable as an investment option. Of course it does. Tenant demand is at record levels, and there remains a large and committed cohort of professional landlords who are keen to expand their portfolios.

However, I believe the events of 2022 – including an increase in mortgage rates – will accelerate the move toward professional landlords that we have seen in more recent years, with more smaller-scale landlords leaving the sector.

Research carried out on behalf of Paragon revealed that landlords’ confidence in the UK’s financial market and their own lettings business is at the lowest level since the height of the COVID-19 pandemic. This is particularly true amongst smaller-scale landlords.

When asked how they felt about the prospects for various aspects of letting, positivity was substantially less prominent amongst those with a single rental property than those with 11 or more.

With income naturally lower due to fewer tenancies, smaller-scale landlords are less-well insulated from any economic shocks caused by voids and arrears. Add to this their higher propensity to have another form of employment – 70 per cent of landlords with 20 or more properties say that they make a profitable fulltime living from letting, whereas 69 per cent of those with a single property state that letting supports their day job – and it seems logical that smaller-scale landlords are more likely to exit the sector in the face of an increasingly trying economic and regulatory landscape.

Although limited data exists to confirm this notion, we do see that landlords with 20 or more properties are almost twice as likely to have bought than sold property within the last three months, whereas those with three or fewer properties are more likely to have divested than invested.

A shift in the types of property demanded by tenants may also be shaping the professional/amateur landlord split.

Demand for semi-detached and detached homes climbed over the past year as the pandemic led to a desire for more space for home working and gardens, while smaller flats and shared living options fell out of favour.

Now these trends appear to be reversing as the draw of city living has returned and the cost-of-living crisis means that the more affordable HMOs and flats are being favoured over more spacious options.

While benefitting from higher yield-generation potential, these types of properties are often considered the reserve of more experienced landlords because they can require more time and money to operate, as well as being subject to additional legislation in the case of HMOs.

So, if the combination of what tenants want, regulatory requirements, and the economic environment creates a competitive advantage for those landlords with larger portfolios and points to a further professionalisation of the private rented sector (PRS), what does this mean for the industry?

While I’m sure brokers and lenders who operate in the vanilla space will still see lots of business, particularly when some stability returns to enable them to offer the competitive rates that typify this type of lending, I think the call for complex lending will grow, with more experienced landlords better placed to thrive in today’s market.

More broadly, what does this likely shift mean for the PRS? We are seeing supply reaching breaking points in certain parts of the market. Images of students queuing around the block to secure a property for the next academic year are a sign of a dysfunctional market. Meanwhile, work by Zoopla shows that tenants receiving housing benefit can only afford seven per cent of two-bedroom and six per cent of three-bedroom rental homes today.

We believe that every tenant has the right to a good-quality, affordable home if they choose or need to rent. That requires more investment in the sector from landlords both large and small. M I

BTL market remains robust, with increased tenant demand

Grant Hendry

director of sales, Foundation Home Loans

The lending curveball on the back of the mini budget, subsequent changes, and swap rate volatility have certainly sent a few shockwaves through areas of the mortgage market.

In order to help the UK population make some sense of this turbulence, an array of broker voices have risen to the fore across our TV screens, radios, in the national press, and on social media. The professionalism and expertise on show throughout these uncertain times have been admirable, and I’m sure they have helped huge numbers of people to get a better grasp of the current and potential impact.

With so many variables still in place, and the speed at which high-level decisions are being made, all of which could affect the housing and mortgage market, it’s difficult to look too far ahead. However, when it comes to the BTL sector, what we can do is reaffirm its robust nature and highlight the solid foundations that were firmly in place before additional economic pressure was brought to bear.

We can use the latest BVA BDRC Landlord Panel research for Q3 2022 to do just that, as this always offers some pertinent insight into performance, sentiment, and outlying trends across the BTL marketplace.

So let’s focus on some of the more uplifting aspects of this research at a time when we all need that extra little bit of market positivity.

RENTAL YIELD

After a dip in Q1, the average achieved rental yield was reported to have edged up for the second consecutive quarter to 5.8 per cent. Breaking this down, landlords with multi-unit blocks of flats achieved the highest rental yields in Q3, at an average of 6.3 per cent. HMOs also achieved a higher-than-average yield of 6.2 per cent. Linked to this, students and migrant workers provided the strongest average yields of any tenant types, at 6.7 per cent.

REGIONAL RENTS

On a regional basis, landlords operating in the West Midlands, North East, Yorks and the Humber, the Northwest, and East Midlands attained the highest rental yields in Q3, all generating average yields in excess of six per cent for this quarter, higher than landlords in general. Landlords operating in outer and central London continued to generate the lowest average yields (c. five per cent) due to higher property prices. It also remained the case that over one in four landlords didn’t know their rental yield or were unsure how to calculate it (29 per cent).

TENANT DEMAND

Turning our attention to tenant demand, the proportion of landlords reporting increased tenant demand rose in Q3, with 65 per cent of landlords reporting an uptick, while only one per cent said they had seen tenant demand decrease to any extent. Larger portfolio landlords (11+ properties) continued to be much more optimistic, with 79 per cent reporting increasing demand.

Regionally, landlords operating in the South West of England reported an increase in tenant demand, with 88 per cent saying it had risen over the last three months (v 82 per cent in Q2 ‘22). Yorkshire and the Humber became the region with the lowest proportion of landlords seeing increasing demand (74 per cent).

In order to support landlord clients in achieving strong yields and capitalising on growing levels of tenant demand, intermediary partners need to be fully aware of the current options on offer. Granted, this hasn’t been easy in recent weeks, but many lenders do remain active and are willing to lend.

Here at Foundation Home Loans, we continue to offer a full range, with products in each tier for residential and buy-to-let, as well as in each of our buy-to-let specialist areas – HMO, MUB, short-term let, and green. And it’s fair to say that specialist lenders will play a key role in helping intermediaries and landlords to access the kind of solutions they need now, and will need in the future. M I

Where are you spending Christmas?

Jean Errington

business development manager, Harpenden Building Society

The opportunity for brokers to expand business in the UK holiday-let space has never been stronger. Here are some of my recent observations.

Holiday-let rentals are less and less limited to the traditional summer months. Taking a break over Christmas, for instance, or throughout the winter months, is very much in vogue. With increasing numbers heading off for a Christmas holiday or low-season staycation, demand for self-catering holiday accommodation is booming, giving holiday-let investors the opportunity for year-’round income.

HOLIDAY-LET BOOKINGS UP

Sykes Holiday Cottages say Brits have been signing up in large numbers for UK-based getaways. Notably, there has been a year-on-year increase in bookings over Christmas and New Year as holidaymakers look to close out the year with a festive getaway. Bookings made for Christmas and New Year 2022 are up 15 per cent compared to the same period in 2021.

POPULAR HOLIDAY COTTAGE LOCATIONS

The top 10 most popular regions for autumn and winter 2022 breaks, according to Sykes, are North Wales; Cornwall; Cumbria and the Lake District; North York Moors; Devon; Yorkshire Dales; Peak District; East Anglia; Heart of England; and Northumberland. These findings concur with the holiday-let hotspots most popular with our brokers’ customers investing in the sector.

As well as holiday lets making a great option for families from the same household, they are a consideration for families spread around the country travelling to meet somewhere in the middle, adding to their popularity.

The top-ranked holiday cottage locations for families travelling from different locations and meeting part way over Christmas 2022 are Cumbria and the Lake District; North Wales; North York Moors; Peak District; and the Yorkshire Dales. Unlike a stay at a hotel over Christmas, families can host their own festivities and spend time with each other in their own way.

As a long-standing provider of holiday-let mortgages, the Harpenden team sees sector trends and what new opportunities are emerging for brokers. Increasing, year-’round short-term rental opportunities make a holiday let an attractive investment opportunity for brokers’ customers.

A SPECIALIST LENDERS’ APPROACH

We recommend that any would-be holiday-let owners consider a specialist lender to finance their purchase – a lender with expertise in and best suited to dealing with the unique aspects of buying a holiday let.

In our experience, holiday-let purchases are often made by customers with multiple forms of income from a range of financial sources. Mortgage applications assessed by a mainstream lender can’t always accommodate customers with complex incomes. Applications assessed en masse by an algorithm, a popular assessment tool used in isolation by many larger lenders, can be rejected at the first step for those customers with a non-standard financial profile. At Harpenden, we, like some other specialist lenders, manually underwrite every mortgage application, helping us to take a considered view – to assess the risk in more detail and to look at the wider picture. We want to say yes; with in-depth scrutiny from manual underwriting, a complex holiday-let mortgage application can often proceed.

We also recognise that investing in a holiday let is not just about the money. As such, we have included an additional feature that allows owners to enjoy their holiday-let properties themselves for up to 90 days per year. As such, a Christmas getaway for a holiday-let owner can be a real option. We accept Airbnb rentals; personal income can be used if required to support the loan (top-slicing); up to three properties on one title will be considered, as are properties above commercial premises; and we offer 75 per cent LTV available on IO and 80 per cent available on repayment.

Our experience in this sector, and the refined criteria developed as a result, provide additional safeguards benefitting all those involved in the purchasing process – lender, broker, and customer. We use rental income projections when considering applications, as well as taking a holistic view of a customer’s financial circumstances.

NEW OPPORTUNITIES

The future of UK holiday lets looks strong year-round. With 13 per cent of Brits planning to take an overnight break in the UK over Christmas and New Year in 2022, holiday-let owners have added opportunity to make good returns from their investments.

With the current holiday-let market providing opportunities for both brokers and their investor customers, a specialist lender is uniquely placed to assist and make that opportunity happen. M I

Whatever your mortgage journey

Warning signs for some lenders are no obstacle for UTB! Our common-sense approach to lending and ability to take a view on cases, helps our intermediaries achieve positive outcomes.

Adverse conditions

• Married sole apps accepted • Lend for most legal purposes • No minimum credit score

• Complex incomes • Ex-council/local authority • Flats above commercial

• No floor limit

• Flying freehold

Non-standard property

• Steel and timber framed

• Concrete

• Single skin brick • Thatched roof

• Listed property

Unusual locations

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