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BUY-TO-LET
INTRODUCER www.mortgageintroducer.com
April 2020
AN EYE ON THE FUTURE Considering the outlook for buy-to-let in unprecedented times
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EDITORIAL
COMMENT Publishing Director Robyn Hall Robyn@mortgageintroducer.com @RobynHall Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com Associate Editor Jessica Bird Deputy Editor Jessica Nangle Jessica@mortgageintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Editorial Director Nia Williams Nia@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Tolu Akinnugba Tolu@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Campaign Manager Joanna Cooney joanna@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com Printed by The Magazine Printing Company, using only paper from FSC/PEFC suppliers www.magprint.co.uk
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Maybe down, but certainly not out
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hese supplements on the buy-to-let market come out bi-annually. When this issue first entered planning in the early part of 2020 the world was a different place. To state the obvious the impact of coronavirus (COVID-19) has been undeniable and has reshaped the market. At the time of writing the government has effectively frozen the property market as part of its measures to contain the spread of the outbreak. But as with anything in life it depends how you look at things. Yes, we could dwell on the negatives but let’s not forget that there are still positives. The consensus among economic forecasters is that the coronavirus disruption will be relatively short-lived. And the fundamentals of the buy-to-let sector remain strong. The professionalisation of landlords over recent years will undoubtedly help at this time. Government initiatives to provide payment holidays to landlords should hopefully provide some breathing room for those dealing with financial difficulties. Just before this outbreak ARLA Propertymark revealed that demand for rental accommodation was at a record level. That demand shows the appetite for rental property. It will surely return when this crisis has finally ended. Yes, it is a difficult time, yes there will be winners and unfortunately losers, but the market will return. It’s time to keep the faith. The market can help support tenants, landlords, brokers and the lenders that make up the industry. Let’s pull together and look forward to better days. BTL I
Contents 4 Feature Looking at the positives for the future of buy-to-let 11 Paul Brett Why now is the time to step up 13 Paul Fryers Looking at the impact of COVID-19 on buy-to-let 14 Jeff Knight Hindsight is a wonderful thing
APRIL 2020 BUY-T-LET INTRODUCER
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FEATURE
COVER
An eye on the future In the face of the ongoing coronavirus pandemic Buy-to-let Introducer asks: What opportunities will be available in buy-to-let once the crisis recedes? Ryan Fowler publishing editor, Buy-to-let Introducer
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t’s been a tricky start to 2020 and there is no doubt that we are experiencing some unprecedented times. We will undoubtably see a slow in economic growth and there is a considerable amount of nervousness in the market due to COVID-19. However, the market is still seeing a flow of business and it’s become apparent that despite this challenging period, on the whole, lenders are well prepared for this. As a result of this difficult economic environment, increasingly we are seeing amateur landlords and property investors exit the market, as experienced professionals are restructuring their portfolios and diversifying into niche market segments such as HMOs, holiday lets, Airbnb, semi-commercial and multi-unit blocks which present good investment opportunities. During times like this, it is vital to focus your attention on your strengths. In the case of many in the industry they can leverage their specialist knowledge and market experience. Brokers and lenders alike must be able to provide a level of expertise that enables them to deliver the specialist know-how to help landlords need to navigate this evolving landscape and get the most
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from their mortgage solution. In particular, the market must turn its attention to vulnerable customers. This matter is currently sitting high on the agenda of many lenders and the Financial Conduct Authority (FCA). Lenders must be able to identify customers that may need extra support and guidance. According to the government watchdog, as many as 50% of UK adults (25.6 million people) display one of more characteristics of being financially vulnerable. Good brokers pride themselves on their strong relationships with clients and they should be identifying factors that may contribute to a client’s financial resilience. Vulnerability can affect borrowers at both ends of the mortgage lifecycle. Borrowers with a small credit file or those who have missed pervious payments at one end of the cycle and elderly borrowers, or clients with serious health conditions at the other end. Once vulnerable customers have been identified, it’s the duty as lenders of modify their approach and service to suit their needs. It is vitally important that we, the market, come together to support our industry and each other. Despite the ongoing uncertainty, we can be sure that this crisis will come to an end, and when it does, we want to ensure we are well placed to help rebuild the market. BTL I
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FEATURE
COVER Jeff Knight director of marketing, Foundation Home Loans
Alex Hammond, director, Mortgage Market Alliance
There is one positive from the current crisis; it will end. At some point. We have just got to work together to get through this as lenders, brokers and landlords. I, like many of you, experienced the credit crunch which turned into a financial crisis. And we got through it. We will get through this and there will be opportunities in the buy-to-let market in the future, albeit these may be a bit different to the past. It all depends on whether the sharp impact is short or not. Tenants will still be in their buy-to-let properties. There will be landlords who see the market as an opportunity to expand their portfolios. Most landlords have bought property for the longer term and and exits seem unlikely. The key is to talk to your clients during this crisis so they stick with you in the future. On top of this, and something to bear in mind throughout this period, is that fundamentally the demand drivers of the buy-to-let/private rental sector are not going to change. Tenant demand will remain strong and landlords, as long as they are looking at the long-term, should continue to see property investment as a strong asset class.
One of the positives we should take away from the current situation is that buy-to-let landlords have finally been acknowledged by government as providing an important element of the UK housing stock through the private rental sector. The confirmation that forbearance measures relating to coronavirus would be available to landlords as well as homeowners looks like recognition by the government that the stability and quality of the private rental market – and therefore the choices available to tenants – is intrinsically tied up with the health of the landlord sector. Demand for rental property has been growing and, if anything this period of uncertainty during which the market has largely been put on hold is likely to create more pent-up appetite from more tenants. It is this demand for accommodation that has always formed the solid foundation of a buy-to-let investment, and if it can also be supported by a more conciliatory approach from the government regarding private landlords and the role they have to play, then we could enter a more benign environment for the sustainable growth of the sector.
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Damien Druce specialist finance business consultant Forgive my assumption here, but I’m thinking that, like me, when you went to the ballot box on that dark and damp December’s day, you were hoping to wake up to a result that would give every UK citizen certainty. Fast forward and we have seen fires down under and devasting floods much closer to home, welcome 2020! We are now faced with a world-wide pandemic in COVID-19 that has shocked the world to its core. The resulting stimulus package from the Treasury is unprecedented and it is great to see some protection of the post-crash recovery. But what does it mean for the buy-to-let (BTL) market? BTL has endured substantial change in recent years and many of those changes should allow borrowers, brokers and lenders to adapt with relative ease. Some of the more mature investors may opt to cash out or bring forward carefully considered legacy plans which has the potential to inject some liquidity and provide opportunity for those looking to scale. It wouldn’t be fair to conclude without mentioning UK Finance and BTL lenders who must be commended for acting with conviction and at great speed. Yes these are testing time, however, I have no doubt that this market as always, will prevail and create significant opportunities as we emerge at the other end…
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FEATURE
COVER Bob Young chief executive officer, Fleet Mortgages
Ying Tan founder and chief executive, Dynamo In unprecedented times everything is a learning process. Lenders are working hard to continue servicing the needs of existing clients in line with government initiatives, engage with new borrowers where possible, whilst also ensuring a safe working environment for their employees. Disruption is inevitable but technology is helping all types of businesses to get through this dark and testing period. Through the social distancing strategy, valuations have become a pressing issue across the mortgage market although lenders who are using AVMs on lower LTV applications are enabling business to proceed. Most product transfers can also be processed without the need for physical valuations meaning there is still BTL business which can be done, and with rates remaining low there remains an opportunity for advisers to maintain close contact with their clients, prove their value and solidify relationships for when we come out of the other side – which we will. Landlords will be quick off the blocks when looking to take advantage of what remains a highly competitive sector, meaning that advisers need to be reacting to their client needs now and also gearing up for when calmer conditions emerge. And the quality of advice on offer will prove key in meeting ever-shifting client demands and servicing the needs of the private rented sector moving forward.
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The overwhelming positive for the buy-tolet market currently is that lenders are very much open for business and we continue to be active in a large number of sectors, which will allow advisers to source purchase or refinancing arrangements for their clients. On top of this, or perhaps under all of this, are the basic fundamentals of the sector which – when we return to some degree of normality – are likely to remain. That being the demand from tenants for quality PRS homes, the continuation of the UK housing gap and its need for private landlords to help fill it, the cost of owner-occupation, the demographics of the country with larger numbers of smaller households, the need for a strong PRS to support social mobility, etc. All these fundamentals will remain in place post-coronavirus and therefore those who are able to invest in property and can hold their investment over the long-term, plus are willing to commit to that property, to ensure it is in excellent condition and that they meet all the requirements of letting a property out, are likely to secure both the annual yield that they require and should eventually benefit from capital improvement too. Now, no-one is suggesting that the months ahead won’t be difficult – landlords need to look after their tenants, advisers need to look after their clients, lenders need to look after their advisers, etc, but the fundamentals at the start of 2020, which were likely to produce a strong 12 months for the sector, are likely to return very quickly.
Liz Syms CEO, Connect for Intermediaries On the face of it, it’s hard to imagine there are any positives for the mortgage market as a whole, let alone the buy-to-let (BTL) market. However, as a typical half is glass full person, I am determined to find some! One area is the innovation coming from some of our lenders who are investing time in finding solutions to some of the restrictions coming from the lockdown and home working. For example, more lenders are introducing electronic ID verification and electronic signatures. Lenders are also developing more products that will allow them to accept Desktop Valuations (AVMs) to avoid the need to send out a valuer. Both of these points help right here and now, but also create a good blueprint for faster and more streamlined applications when the market returns to normal. The same can be said for the legal part of the process. Lenders are instructing solicitors, for example, that they will accept advice being delivered via conference calls, and also using this with digital ID as an alternative to face to face identification. For BTL advisers, now is a fantastic time to spend increasing knowledge into connected areas, such as business loans and commercial mortgages, so that they can help more clients. The typical face to face training has been replaced with a wealth of quality ‘virtual training’ making it even easier for advisers to expand their offerings.
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FEATURE
COVER Jane Simpson managing director, TBMC
John Goodall CEO, Landbay
Although it is unclear how long the COVID-19 emergency measures will be in place, once restrictions are lifted there will be some positive outcomes for those working in the buy-to-let sector. Firstly, there will almost certainly be pent-up demand for buy-to-let finance that will benefit the marketplace once things get back to normal. Many lenders have reduced their LTVs and some have withdrawn from the market, but once lenders return to business as usual landlords will be keen to arrange buy-to-let mortgages, therefore providing a boost for lenders and intermediary businesses too. This could see renewed competition in the marketplace and some attractive deals for landlords looking to make new purchases, remortgage to a different lender or take advantage of retention rates being offered by their current provider. Also as people have been advised to put moving house on hold, the housing market has slowed down but once people are allowed to proceed with their property transactions and valuers are able to carry out visual inspections, the housing market should also experience a boost which could provide new options for landlords to expand their portfolios. It is likely that the buy-to-let sector will bounce back once the pandemic has passed providing new opportunities for landlords, lenders and brokers.
At a time when few lenders can lend, either as their funding is too expensive or because it is not possible for valuers to enter people’s houses then it can seem hard to look at positives. Payment holidays are also putting some additional operational burden on lenders which is having an impact on their cost of funding, however, look towards the long term and positives are most definitely there. In the short-term, lenders will be focussing on their pipeline and lending on existing cases. After that any lending is likely to be on remortgages. A key thing to remember is that, unlike the credit crunch, the situation that we are in now is not caused by risky lending but by a public health crisis. This means it is unlikely to last anywhere near as long as the credit crunch did and then we can expect to see some kind of bounce back. The buy-to-let market was in quite a good place at the start of the year, and longer term, as we get through this, there will be increased demand for rental property. If we get a situation where house prices fall by more than rents, which is highly likely as rents are a lot less volatile, then a landlord’s yield will improve. In this case we will see an up-tick in buy-to-let purchase activity. Whether it will be towards the tail end of this year or 2021 I don’t know, but when we get through it there is definitely the potential for increased activity.
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Angus Stewart chief executive, Property Master Someone has hit the pause button on the property market. Thousands of mortgage products have been removed, mortgage lending criteria have been tightened in a spectacular way, and a significant number of lenders have chosen to exit the buy-to-let market altogether albeit temporarily. But I do believe there is evidence to suggest the sector will bounce back. Firstly, there has been a trend over recent years for a greater professionalisation in the wake of more regulation and the removal of many tax benefits. Many smaller landlords have left the market to be replaced by larger landlords who have a portfolio of properties, essentially allowing them to spread of the risk of any tenant defaults on rent and void periods. Recent record low fixed rate mortgages have helped landlords better manage their outgoings and there is evidence to suggest landlords have sought to strengthen their financial position by reducing the amount of borrowing relative to the value of their portfolio and to diversify into higher yielding investments such as HMOs. Finally, this crisis is very different to the financial crisis of 2008. Banks have large war chests; this is not a liquidity crisis. There is no reason to suggest lenders will not return to the market once this situation passes.
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06/04/2020 12:47:14
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REVIEW
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Patience, kindness and a stake in the future Paul Brett director of intermediaries, Landbay
W
hen writing any kind of article at the moment, there is an increasing likelihood that events will have moved on so far as to make the topic irrelevant before it is published. Only four weeks ago, there were still plenty of upbeat news stories. How quickly times have changed! As I write this, the housing market might be in limbo but lenders and brokers are working hard to continue providing a service for pipeline business and existing customers and that is why we all need to coordinate our efforts to make sure that what business that can be completed, gets done. EXEMPLARY
The general response from most introducers, to the changes that are taking place, has been exemplary. With many having customers involved at every stage of the mortgage process and understandably anxious, brokers have had to be extremely patient both in managing customer expectations and working with lenders trying hard to respond. All I can ask is that we all continue to recognise the unprecedented pressures we are all experiencing and treat each other with consideration. Maintaining close contact with your current and existing customers is going to be vital. They are going to need your support more than ever. Letting them know what they can do to help themselves by providing guidance on managing their finances and how best they can contact their mortgage or loan providers if they are in difficulties, is www.mortgageintroducer.com
not only the correct thing to do but will also help cement relationships which will be the foundation of your future income when the market comes back to anything like near normality. Lenders are trying hard to ensure that post offer business goes through to completion and as brokers your help is going to be needed to ensure that all parties including conveyancers have everything they need to complete transactions. Conveyancers will also be struggling to maintain a full service as staff sickness and the facilities to work from home are put in place. We are all going to have to exercise a lot of patience and remember we are all trying to do the best that we can. So, let’s cut everyone we deal with plenty of slack. On a practical note, let’s not forget that many customers will be reaching the end of fixed rates and will be looking for advice on what step to take. Remortgaging is still an option for some, but it is unrealistic to expect to be showered with great terms at this time. The main exception might be for
Facing the future with confidence
those with low LTVs, but in this fluid situation, with constant changes to criteria and products available, we all need to be aware that there are no certainties at the moment - so be prepared. Make sure communication between you and your customer is regular but consistent and don’t make promises when the supply chain is struggling to cope. We are fortunate though in other ways. For all the mistrust of technology that the doomsters believe will mark the end of intermediary based advice, let’s remember that the same technology is helping to keep lenders running. Even ten years ago, it would have been impossible for so many lenders to keep functioning without the technology now available, allowing key staff to work seamlessly from a home base, for example. DIGITAL PROCESS
In that time, much of the mortgage process has gone online – when was the last time you filled in a paper application form? Here at Landbay, we have just launched what we believe is the first online instant DIP service which now makes our end to end online mortgage process the best in the sector. Under the current circumstances, technology or not, we all face an uncertain future at present. However, this crisis is not going to last and our industry has the best tools to face the future with confidence when it comes. So, hang on in there, we will beat this together and when the ‘all clear’ sounds, we will be in the better shape to cope with the demand that is bound to follow. I recommend that we all open our minds and, while we have some free time, make sure we have built an understanding and a stake in the technology which is going to power our businesses post COVID-19. Only by working together can we see our way through this crisis and mortgage brokers have a central role to play in maintaining a mindset which recognises that patience, kindness and consideration for each other is the only way to ease our way through both personally and professionally. BTL I APRIL 2020
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REVIEW
MARKET
2020: A BTL lens on COVID-19 Paul Fryers MD, Zephyr Homeloans
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t the time of writing, we’re all trying to make sense of the implications caused by the COVID-19 pandemic and consider what the market may look like moving forward. It’s therefore pertinent to consider Interest Coverage Ratios (ICRs) and the associated criteria that defines buy-to-let (BTL) underwriting standards. In recent times, we saw the Prudential Regulation Authority (PRA) lay out that its underwriting standards could lead to ICR thresholds increasing above the minimum industry standard of 125 per cent of mortgage interest payments. And indeed, saw this happen in January 2017. The rules were introduced to protect the financial system from future risks in the BTL sector, such as a global crisis, which we are currently experiencing. The PRA of course wants to ensure that loans are affordable for landlord borrowers, not just regarding their monthly mortgage payments, but also for all the other associated costs of renting a property or running a property business and, importantly, to provide a financial cushion during tougher times. A clear difference between the current COVID-19 crisis and the credit crunch of 2007/8 has been the speed at which a health crisis has driven financial issues or concerns for everyone. This will certainly test the robustness of lender ICR affordability calculations, as adjustments are made to the new economic reality the country is facing. Lenders are now offering mortgage payment holidays where a tenant is unable to pay rent, resulting in the landlord experiencing financial difficulties. However, this is not free money - underpayments need to
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be repaid over the remainder of the mortgage term(s). To mitigate this, the need for landlord and tenant to work together, with support from lenders, is critical to seeing this difficult time through. WHERE NOW FOR SPECIALIST BTL?
Clearly, the specialist lending market is contending with many significant challenges arising from the crisis. Amongst them is the fact that business models have been halted in their tracks by the wholesale funding markets being closed. Some lenders have elected to pull the drawbridge up and focus 100% on existing customers, whilst some have trimmed their product ranges back in significant ways whilst maintaining their presence; neither of which are decisions that any lender would have wished to take in what was a functioning and buoyant market. Although it’s worthy to note, that despite the very challenging circumstances that hit the markets, two securitisations comprising of specialist BTL loans were closed in March. Yes, both deals had no doubt been in the planning stages for a few months. Nonetheless, they demonstrated that some investor appetite to buy into UK specialist BTL securitisations remained; even in the face of this crisis. This is hopefully a good sign that, when we’re in calmer waters, a degree of normality should emerge but might take some time to correct and repair. BTL I
A time for resilience
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lthough the market has experienced crises before, this is the first health crisis that has caused the specialist lending market to pause. That said, market participants from brokers to lenders and funders are already exhibiting resilience with evidence of pragmatism and good communication as to why changes to products are being affected so quickly. In response to the Chancellor’s announcement that mortgage payment holidays would be offered to those impacted by the pandemic, the call centres in our business, along with all other lenders, experienced a significant spike in calls from customers concerned enough about the state of their finances to request a payment holiday. For example, we have experienced at times a 500% increase on average call volumes, all being received at a time when home working was being rolled out, Business Continuity Plans enacted and on top that schools being closed. Plans were implemented in a short space of time and I’d like to take the opportunity to thank everyone in the mortgage industry, who are collectively facing these multiple challenges in order to provide a service to customers. I really hope, as I’m sure we all do, that the COVID-19 crisis leaves our lives as quickly as possible and that the “pause” placed on the specialist lending market ends, so we can all press “play” again. BTL I
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ephyr Homeloans is part of the Computershare group, a global financial organisation headquartered in Melbourne, Australia. Computershare Loan Services is also part of the group and is the UK’s largest third-party mortgage administrator. With around 30 years’ experience of managing mortgage portfolios for all types of lenders, Computershare Loan Services currently services several legacy books of lenders
impacted by the “credit crunch” and the ensuing financial crisis of 2008 onwards. The adjustment experienced in the market afterwards caused many lenders to invest in their back-office servicing processes and teams. Whilst the Covid-19 crisis is different we’re seeing lenders similarly having to adjust, albeit more quickly, to deal with and service the needs of existing customers by re-directing their resources.
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2020 vision and hindsight Jeff Knight director of Marketing, Foundation Home Loans
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n the year 2020 I believe there are a lot of people out there who are currently thinking, ‘If only? If only we had done this…and that…and the other, then we would have been okay…’ Hindsight is a wonderful thing. So it seems somewhat ironic that in 2020 we will talk a lot about 2020 vision. Now Alannis didn’t mention that in her ‘Ironic’ song. We all knew about COVID-19 but have all been hit at speed in a way noone was expecting. And the fall out is catastrophic. CONTINGENCY
No doubt we will now have a plethora of articles about ‘lessons learned’ and all that but I do think the only real lesson we should take for the future is that we all need to think ‘what if’ with our businesses and not just have plan Bs, but Cs and Ds. What this looks like will vary by business and no-one can ever predict the future; we just need to be more fluid to adapt. In fact, the big buzz word in IT for a few years has been ‘agile’ and to avoid the need for more hindsight thinking. Having 100% foresight is not possible - unless you have a functioning crystal ball of course - but being flexible with strategy and offering will be important. In the future, there’s no doubt that diversity of offering will be vital for many. So, what does this all mean for buyto-let? Well, for intermediaries, I think it clearly demonstrates the need for diversification right across the piece – whether you’re a specialist buy-to-let adviser or not. If you are, then landlords – as much as any other borrower – will have other product needs that you
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should certainly be servicing. Don’t just focus on the mortgage and ignore everything else. You may feel that that you do not have the expertise in-house to deal with this, but then there are so many opportunities to collaborate with other specialists. So diversification can be indirect as well as direct. Firms will often argue that this approach means they lose ‘full control’ when actually service agreements can be put in place that provide peace of mind in terms of client ‘ownership’ and ensure the client has all the protection they need. Doubly important, given the current situation and what many borrowers – landlords or otherwise – are facing. And then there’s the situation for the landlords themselves – indeed all types of clients. Again, this current market appears to show the benefits of having a fully diversified property portfolio, and a fully-diversified array of investments in general, including access to cash. For landlords, that diversity can help them ride out any downturn, so they may want to consider the property types they own, their location, the tenant demographic, etc, and seek to ensure that not all their property eggs are placed in the same basket. And, in a wider sense, there is perhaps a need to look beyond the property market, which might be an
odd statement for a mortgage lender to be saying, but I can’t help recall the very first job I ever had. I sat across from a lady who had worked at the same business for the last 20 years and would impart different bits of advice; one of those was to ensure that, at any given time, I had three months’ worth of salary in savings just in case I needed to access them. OPPORTUNITY
Now, at the time, it seemed like a big ask and it may well seem the case today but it’s certainly worthwhile trying to achieve it. However we might view the property sector – and of course it provides a great investment opportunity over the long-term – it’s also true to say that accessing a property’s value does take time. It can’t be done in a day. So, landlords (and indeed their advisers) should always try to have a diversified investment portfolio which means being able to access cash quickly if required. The Coronavirus crisis has given us a prime example of a situation which can escalate rapidly and the need for accessible, fluid assets is going to be paramount for many, many people. Hindsight is a wonderful thing but what will beat it every time is having a plan in place and preparations which allow you to deal with even the most fluid and fast-moving of situations. BTL I
Proper planning will beat hindsight every time
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