Feature: A special year for specialist finance

Taking a leaf out of landlords’ books

For first-time buyers and those struggling to get into the property market, it would be easy to look with envy at landlords boasting a string of properties – they are the ones, it might be suggested, who are driving up house prices by scooping up the country’s limited stock and soaking up the financial rewards.

However, if you have had dealings with those who do business in the buy-to-let market, you will be quick to paint a different picture. Landlords, or at least the majority, have their goals set very much around consumers’ needs.

For proof, look no farther than Paragon Bank’s Landlords Report 2022. It found that when expanding portfolios, landlords’ top priority is ensuring that properties are suitable for their preferred tenant type; this was chosen by just over half, or 51 per cent, of the 621 landlords surveyed.

The report gave the example of David, a landlord from Durham who manages a 20-property portfolio with his wife Joanne, and who shared that living close to their portfolio meant he can respond quickly to tenant requests for assistance.

“I attend every letting viewing with the agent in order to meet all prospective tenants to discuss their needs, wants, and background on the day,” he said.

Considering how properties meet the needs of tenants is top of the list of priorities for landlords – somewhat in contrast to the negative perception of profits over people.

It’s a lesson that strikes at the heart of every successful business – and one brokers should be keen to focus on amid the ongoing cost-of-living crisis. There has rarely been a time when placing the needs of the customer first has been more important – and with that comes an enhanced reputation and positive word-of-mouth. It’s not about profits vs people; it’s about happy people = profits.

4 Feature: A special year for specialist finance

Is now the time for the unique solutions this market can offer to step up and thrive with more mainstream acceptance?

Paul Lucas

9 Interview with Smartsearch’s Collette Allen 10 Bridging Finance 12 The untapped potential of second charge lending 14 Q&A with Louis Alexander, CEO at SoMo 24 Development finance 32 Commercial finance 36 Buy-to-let 39 Asset finance & Secured loans

42 Classifieds SoMo_Specialist_Finance_Strip_Ads_126x22mm_May22.pdf 4 23/05/2022 11:15

A special year for specialist finance

A SPECIAL YEAR FOR SPECIALIST FINANCE

With the world still reeling from the impacts of the COVID-19 pandemic, hopes of some normality returning in 2022 were quickly stifled by the Russia-Ukraine conflict, the energy bills crisis, and inflation reaching its highest level in 40 years. In the 12 months to April 2022, the Consumer Prices Index rose by nine per cent – a massive single leap from March’s seven per cent level. Meanwhile, in the same month, and with the war in Ukraine significantly affecting global trade and oil prices, energy prices leapt by 50 per cent – and are expected to continue to spiral at a rate 14 times faster than wages for the remainder of the year.

With such constant upheaval, does anyone even know what normality looks like anymore?

Yet amid the global pandemic, the mortgage market thrived – house prices continued to spiral upward, spurred by an urban exodus as people stopped relying on city living and looked to acquire more space to accommodate their home office environments. So now, in the face of a newly challenging landscape, could the mortgage market thrive again? And what does it all mean for specialist finance in particular? Is now the time for the unique solutions this market can offer to step up and thrive with more mainstream acceptance? Or will these tailored solutions fall by the wayside as budgets grow ever tighter?

FIRST HALF OF 2022

Fears of a downturn for specialist finance, it seems, have quickly been put to rest.

According to Amadeus Wilson, director of SPF Short Term Finance, the specialist finance

market enjoyed an exceptionally strong start to the year despite the challenges facing the economy and global markets due to inflation and the cost-of-living crisis. Wilson explained that there are more lenders than ever in the short-term funding space, with fierce competition driving prices down. “Subsequently, the cost of funding is not such a shock to clients accessing bridging for the first time, as may have been the case in the past,” he said. Wilson added that the auction finance market has been busier than ever in the first half of 2022, too. “This is because the housing market is so frenetic and competition is hot for certain stock, such as family homes. More people are going down the non-traditional route to find such properties and buying at auction,” he said. In addition, the company has seen clients taking on bigger projects than they might have in the past. One example Wilson quoted saw a client purchase a Victorian house that had been converted into three flats, with the intention of returning it to a single dwelling. In another, a massive duplex saw the downstairs section converted so that it could be rented out to cover the mortgage. Despite the economic headwinds and the challenges of a rising interest rate environment, Philip Anderson, lending manager at BLEND Network, concurred with Wilson and said that the specialist finance market has seen significant growth since the start of the year – continuing the momentum that had been building for the last couple of years. For example, he pointed out that the bridging finance industry was worth £1bn in 2011, while SoMo_Specialist_Finance_Strip_Ads_126x22mm_May22.pdf 1 23/05/2022 11:15

10 years later it was valued at £7bn.

According to Anderson, there are several reasons for this buoyancy, but perhaps the key is the more flexible nature of this type of finance and the fact that during COVID-19 many property developers, particularly SME developers, were cut off from more mainstream and traditional sources of finance.

“While a decade ago the high-street bank used to be the first port of call for any type of mortgage or development finance loan, today’s developers have a much wider range of finance options to choose from, with specialist finance offering them the flexibility and agility they need,” he said.

Still, not every sky has been clear for the market – there have been clouds, too. Nick Morrey, technical director at Coreco, said the first six months had been challenging for many specialist lenders.

He outlined that many non-regulated specialist lenders do not have a savings arm and rely on funding lines from various sources to trade. Those business models, in turn, often rely on the mortgages being securitised, enabling them to lend to new customers. “With things like the war in Ukraine, cost-of-living crisis, and rising interest rates, the markets for mortgage funding are a little nervous and a mistake could cost millions,” he said.

He said that, luckily, many of these lenders had diversified their funding streams and were managing to securitise the loans they have completed on, allowing them to continue despite the recent headwinds.

“Competition remains tight among these lenders, and now that the tax relief on rental income has truly gone and tax returns are being submitted, business for limited company buyto-let is brisk, as landlords realise it might be the best option right now,” Morrey added.

Gavin Richardson, managing director

of Mortgages for Business, also stressed the uncertainty the industry has felt over the first half of the year. “People are nervous that interest rates will keep rising and they are not sure if the base rate will curb inflation enough,” he said. He added that there is speculation that the property price bubble will burst, and he believes we are yet to see the impact of rising mortgage rates on lenders’ stress tests. In addition, he said, no-one knows whether levelling up will create new hot spots or an election in May 2024 will derail levelling up altogether. “On top of the economic concerns, the removal of Section 21 is making landlords nervous – perhaps more so than the rising rates,” Richardson added.

CHALLENGES FACING THE MARKET

Looking to the challenges currently facing the specialist finance market, Wilson said that while the market is buzzing, there are many issues facing brokers, borrowers, and lenders alike. He explained that with so many new lenders offering cheap pricing in order to generate business, it can be hugely tempting to opt for one of these providers, but he said it is important to remember that it does not necessarily follow that it will be the best fit for the client – something that can be difficult for brokers to explain to clients who believe cheapest is best. “There is a high risk of brokers who do not specialise in this market opting for the ‘wrong’ lender,” he added. If it turns out that the lender does not know how to execute a deal, so clients do not get the funding they want when they need it, the likely outcome is disappointed clients. According to Wilson, finding the balance between execution of the deal and price is an ongoing challenge for brokers. SoMo_Specialist_Finance_Strip_Ads_126x22mm_May22.pdf 2 23/05/2022 11:15

While pricing has been rising in the mainstream mortgage market, this has not happened yet in the specialist space – but Wilson said it is only a matter of time. He believes that banks offering bridging finance are increasingly anxious to raise their pricing as the cost of funds goes up, but no-one wants to be the first to make such an unpopular move.

“At the same time, the many specialist lenders desperate to get money out the door are keeping the market artificially cheaper than the real or natural rate should be,” Wilson added.

While mortgage rates have been increasing, resulting in the cheapest deals starting from just over 2.5 per cent, it is still possible to obtain bridging rates at under five per cent – so the gap between the two has never been narrower.

“Bridging pricing is now more akin to a buyto-let mortgage, which has never been the case before,” Wilson said.

Richardson also believes that a core issue for brokers is the high street lenders who have tried to move into the specialist lending market with cheap rates.

“A few have turned out to have quite vanilla propositions and, to gain market share, some lenders have under-priced with rates that are not sustainable,” he said.

That has added to a lack of trust in the sector as, according to Richardson, agreed mortgages have been pulled out from under the feet of borrowers right up to the point of completion in some instances. While he noted that this is rare, Richardson said it demonstrates the value of using a broker who knows and understands the lenders and the market well.

In addition, Richardson said brokers have had to cope with record numbers of applications, driven by rising interest rates and the need to get applications in before further

rises occur, as well as the economic backdrop, which is causing issues for brokers and lenders alike. As landlords scramble to fix their rates before the base rate increases again, Richardson said lenders are struggling with a delicate balance of maintaining some level of margin and trying to manage their volumes. “This has led to lenders having to pull products and bring in new rates at short notice,” he said. “The high product turnover is keeping brokers and clients on their toes to ensure the rate at the start of the application process is still there by submission.” Richardson also explained that the inevitable scramble to secure rates has seen a rise in applications submitted to lenders partially packaged, and that is causing more work farther down the line. “Once [an application is] submitted, it is clear that, for some lenders, the volume is overwhelming underwriting teams,” he said. As a result, Richardson says, lenders are looking to more criteria-based underwriting rather than individual focus to speed up their processing times. “It is not just lenders feeling the resource pinch – there is a lack of surveyors, and the last six months has seen an increasing demand from landlords for brokers to give tax advice, something we just cannot do,” he said. Anderson, meanwhile, pointed to challenges in finding the right lender for a client’s needs. “In terms of challenges brokers are facing, when we speak to our borrower network the theme that continuously comes up is the challenge of finding a lender who is agile and flexible, yet experienced and a serious player at the same time,” he said. Anderson added that brokers have SoMo_Specialist_Finance_Strip_Ads_126x22mm_May22.pdf 3 23/05/2022 11:15

noted issues with turnaround times from mainstream lenders.

He believes brokers need to be able to provide developers with reassurance that finance will be available to them, so they have the confidence to acquire sites and do not incur unnecessary costs.

“We believe this will continue to drive the trend to specialist finance providers, as their turnaround times tend to be quicker throughout the lending process,” he said.

WHAT BROKERS SHOULD LOOK OUT FOR

Wilson outlined that while pricing is likely to focus brokers’ minds in the second half of the year, they should keep an eye beyond the headline rate.

“There may be hidden fees that are not clear to those unfamiliar with the new entrants, such as exit charges that are not explained clearly enough to the client and that only become apparent when it is too late,” he said. While pricing is, of course, a key part of any deal, Wilson said that brokers need to remember that, ultimately, delivery is all-important.

Richardson, meanwhile, explained that lenders are increasingly choosing to work closely with brokerages to understand what landlords want and need and shape their propositions accordingly.

He pointed toward holiday lets, caused by the boom in staycations, as an area of the market for brokers to focus on.

“We now have over 20 lenders offering holiday-let mortgages, which between them offer up to 80 per cent loan to value (LTV), and with rates from 3.59 per cent on a two-year fixed rate, through to 3.69 per cent for a five-year fixed rate at 75 per cent LTV,” Richardson said.

He believes that landlords have recognised the opportunity, as well-maintained properties

in the right locations can produce yields of over 12 per cent. Elsewhere in the specialist buy-to-let market, Richardson said the gap between average gross yields for HMOs and vanilla properties has narrowed recently. “Our research into HMO trends shows that in 2022, gross yields on HMOs sit at 7.6 per cent compared to 5.4 per cent on vanilla buy-to-lets,” he added. At the time of writing, 27 lenders offer HMO mortgages to individual applicants and 23 to limited companies. The lender market is more competitive than it was – there were only 15 lenders willing to look at HMOs in Q1 2010, and Richardson said that the white heat of lender rivalry is improving rates overall. “They currently start from 1.94 per cent for individuals, and from 2.69 per cent for limited companies,” he added. Specialist brokers are also being supported by the status of the homeowner market. Richardson explained that residential buyers are turning to bridging loans to get an edge over rivals amid intense competition for the tiny stock of homes on the market. He believes homeowners are looking to circumvent the need to sell one home before buying another. As competition for homes has stepped up, estate agents and sellers have favoured cash buyers, who can complete a purchase more quickly and flexibly than those seeking a mortgage. Bridging loans, which can be obtained faster than a mortgage and held in readiness for a bid, give borrowers this cash advantage in the market. “As buying agent Henry Pryor put it in the FT recently, ‘If you haven’t got the money in a Samsonite, you might as well go home,’” said Richardson. SoMo_Specialist_Finance_Strip_Ads_126x22mm_May22.pdf 4 23/05/2022 11:15