Buy-to-let Introducer October 2021

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October 2021

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EDITORIAL

COMMENT

Contents 4 Cover: The road ahead Natalie Thomas considers the pandemic’s impact on the buy-to-let market, and how this might change the onward path

Publishing Director Robyn Hall Robyn@mortgageintroducer.com Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com

T 31

Editor Jessica Bird Jessicab@sfintroducer.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 Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com

MORTGAGE

INTRODUCER

Happy birthday buy-to-let

his year, the buy-to-let lending market reached a milestone 25 years since it originally emerged onto the scene. In age terms, this makes it a fully fledged adult, with a grown up personality, aspirations and responsibilities. However, it is a young adult, with a long journey ahead of it and much change on the horizon as it navigates the next quarter century.

As with many age milestones, the temptation is to look back at where we’ve been and how far we’ve come. Indeed, the figures alone show a story of healthy growth, from products offered by just a couple of lenders at the market’s inception, to the thousands of options available now.

The market has matured in more ways than just product choice. It now caters for a wide and ever-diversifying range of borrowers, and a growing range of property types and uses. Whether vanilla residential or complex commercial, this is a market with many facets.

With a strong grounding built up over the past two and a half decades, the market is now looking ahead to how it will shape – and be shaped by – the future of the UK. With challenges around meeting government climate change directives, addressing constantly changing tenant demands, growing and improving the UK’s stock of available housing, and many more, there are some serious responsibilities to meet ahead of the next milestone birthday.

Stocked with increasingly resilient, financially savvy borrowers, and innovative experts ready to support them, the tools for success may already be at hand. BTL I

9 Tim Newman Driving towards a greener PRS 11 Sundeep Patel Huge opportunities for property entrepreneurs 13 Adrian Moloney HMOs can help clients diversify 15 Roger Morris Could top slicing help?

17 Emily Machin Which ownership structure is right?

19 Charles McDowell It feels like a new year 21 Andy Virgo Evolution is key to success 23 Paul Brett Interest in large loans for HMOs and MUFBs 25 Andrew Ferguson The evolution of BTL 26 Round-table: Chasing demand Buy-to-let Introducer’s panel discussion looks at the future for this market 32 Spotlight: Lessons learned Jessica Bird speaks to Paul Fryers at Zephyr Homeloans 34 Liz Syms Affordability tips and tricks

We’re specialists in BTL

Purchase of a four-bed HMO where the applicant only has 1 background BTL. - Applying on a standard Zephyr product under one AST as the Local Authority do not require a licence.

www.mortgageintroducer.com

OCTOBER 2021

zephyrhomeloans.co.uk

BUY-T-LET INTRODUCER

3

FEATURE

COVER Natalie Thomas considers the pandemic’s impact on the buy-to-let market, and how this might change the onward path for property investors

T

he life of a property investor is never dull – whether due to changing tax laws, increased regulation or constant shifts in rental demand, not least those caused by the pandemic in recent months.

Nevertheless, with some record low mortgage rates on offer and rental demand that shows no sign of abating, there are still plenty of gains to be had as a landlord.

With the possibility of further tax changes, a more fintech-enabled sector, and a push towards greener rentals, the road ahead for landlords has the potential to be just as eventful as the one behind – making it vital that brokers are up to speed on the changing market.

NO TIME TO LINGER The past 12 months have been fast-paced in the buyto-let (BTL) market, and even well-informed investors have not been able to afford to take their eye off the ball.

Marcus Dussard, sales director at Hampshire Trust Bank (HTB), believes professional landlords in particular are benefitting from the current market conditions.

“Levels of confidence are high across the sector,” he says. “Generally speaking, professional landlords are demonstrating their long-term commitment to their investments, and continue to take advantage of a robust housing market and favourable lending conditions to manage and bolster their portfolios in a highly professional manner.

“From a lending perspective, there’s a huge amount of competition, which is generating some highly attractive rates and helping to stimulate activity across many regions of the UK. “As the market becomes increasingly congested and complex from a borrowing standpoint, the value attached to the intermediary advice process continues to rise.”

Indeed, according to UK Finance’s latest Household Finance Review, BTL landlords completed 15,200 new loans in June – the largest monthly volume of purchases since 2016.

The stamp duty holiday can, in part, be attributed as the catalyst for the growth in activity.

Paul Brett, managing director of intermediaries at Landbay, says: “The BTL market is in great shape, and we have had our busiest year to date, partly fuelled by the stamp duty holiday.

“We found that some landlords who are building up their portfolios brought their plans forward to buy

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BUY-TO-LET INTRODUCER OCTOBER 2021

FEATURE

COVER before the first deadline passed in June, but the final September deadline has also been an incentive, especially at the lower end of the market for properties under £250,000.”

While the market is expected to slow in the aftermath of the holiday, competition from lenders should ensure brokers are kept busy.

Greg Cunnington, director of lender relationships and new homes at Alexander Hall, says: “We are seeing plenty of activity still in the BTL market, with landlords still active.

“With BTL mortgage rates at record lows, this is not surprising, as it is a great time for landlords to invest and lock in cheap financing.

“Similarly, we are seeing quite a few landlords remortgage and release equity from existing portfolios to fund deposits for new purchases.”

Sarah Findlay, senior marketing consultant at Dynamo, believes clients have become more savvy during the events of the past year or so.

“They have realised that money sitting in a bank with inflation heading upwards will do nothing, and therefore – coupled with attractive mortgage rates – we are still seeing a strong demand for BTL,” she explains.

Even without the low rates on offer, as with the wider housing market, the underlying issue of a lack of supply continues to push the sector’s growth.

Adrian Moloney, group sales director at OneSavings Bank Group (OSB), says: “BTL will continue to be popular, especially as one of the key issues facing the UK housing market is that there’s lots of demand for properties and not enough supply.

“The effects are spreading to the rental market: as homeownership levels fall, it creates an increase in renters and a steady rise in property prices.”

However, it is not a simple picture, as this lack of supply is also currently working against landlords in certain regions.

Hiten Ganatra, managing director of Visionary Finance, says: “It’s a tough market at present, particularly as the lack of supply of stock in the housing market means there isn’t a huge choice available.

“Landlords are competing with owneroccupiers who are looking to get onto the ladder due to the very competitive rates currently for residential mortgages.”

He goes on to say: “House prices in many areas have outstripped any rises in rents, so yields are being squeezed at a time when landlords have experienced a multitude of tax changes.

“The good news is that there are a lot of lenders out there, and this means they are competing for business and there are some good mortgage deals out there for those that can take advantage.” www.mortgageintroducer.com

OUT WITH THE OLD When it comes to what types of properties investors are competing for, the dynamics of the market have shifted somewhat, with previous safe bets – such as inner-city apartments – losing some of their appeal.

The more proactive investors have been able to spot the trends and act quickly.

“Flats have always been popular with landlords, and that remains the case, but we have noticed a rise in BTL mortgage applications for houses this year,” says Brett.

“Houses tend to offer more space indoors and are likely to have a garden.

“This is what many people are after, as working from home has become a part of normal life, and that trend is likely to continue to some extent.”

Sundeep Patel, director of sales at Together, says: “Working from home during the pandemic has made a lot of tenants realise they don’t need to be as close to their place of work – particularly for workers in central London – and they have taken this opportunity to look at renting in these more rural and coastal areas with larger outside space, which has driven up prices.”

“It’s a tough market at present, particularly as the lack of supply of stock in the housing market means there isn’t a huge choice available.

Landlords are competing with owner-occupiers who are looking to get onto the ladder due to very competitive rates currently for residential mortgages” Nevertheless, Dussard says: “When it comes to demand, we are likely to see urban areas bounce back after an inevitable lull, although the quest for space – both internally and externally – will remain a strong pull for some tenants.

“Landlords need to be fully aware of changes in tenant needs, and it will be interesting to see if and how these urban to countryside living aspirations shift over the course of the next six months.”

One type of property that has been doing big business as a result of the pandemic – and the restrictions in place around travelling abroad – is holiday lets, according to Patel.

As well as existing landlords looking to take advantage of changing market conditions, the pandemic has also drawn new investors into this side of the market.

“There were higher numbers of affluent buyers who built up substantial savings during the lockdown, and as savings rates were low even before the pandemic hit, they seem to have been looking to BTL as a way of achieving better returns,” says Patel.

OCTOBER 2021 BUY-TO-LET INTRODUCER

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FEATURE

COVER

The wider picture

N

o predictions could be made as we hit the end of Q1 2020 – it was a pure fallacy to think we could envisage what was to come next.

As we now know, the famine in the wholesale markets was temporary, and it’s been a feast of property acquisition and activity ever since. Yes, the stamp duty incentives have without doubt created high levels of sustained activity throughout the remainder of 2020 and 2021, but there have also been a great many other factors at play.

Extreme factors aside, the fundamentals remain. Bricks and mortar have long been the staple diet of savvy UK investors, and with savings rates already at historic lows – as well as other types of investments being seen as too much of a gamble by many – buyto-let (BTL) is invariably seen as the safest long-term investment.

There’s comfort in tangibility.

Added to this, the interest rate backdrop has long been in favour of borrowing, not saving. It’s always nice to gain long-term capital appreciation on 100% of an asset when you’ve only invested, say, 25% of the value.

Average property prices are higher than ever at a smidge under £263,000, hitting record highs in August this year, but the pace of growth is undoubtedly slowing. This should be good news to landlords, who’ve been sitting on their hands for some time and who are now dusting off the war chest ready for new acquisitions.

However, despite this indication that the market is cooling, the backdrop still supports further – albeit slower – growth in the short-term, as demand outstrips supply and consumer confidence is returning to pre-pandemic levels.

Lenders are keen to attract new business, with rates dropping to unprecedented levels. I’d expect the BTL market to hit £40bn in lending volume this year, comfortably. Lenders are also flexing their muscles in the form of criteria amendments, and are keen to reshape and mould propositions to support landlords.

However the market advances from here, BTL is set to remain strong. A recent survey by Paragon found that nearly 40% of landlords reported an increase in tenant demand, illustrating this robustness.

In 2020, 41,700 UK special purpose vehicles (SPVs) were set up for property investment, another strong marker for landlord intentions.

PANDEMIC CHANGES I think we are now seeing a more stable market, which is the closest we’ve been to a ‘pre-pandemic’ market in the entire 18 months.

The sustained swell of activity as a result of the pandemic wasn’t really sustainable for much longer, with many service parties – including surveyors, solicitors and estate agents – starting to creak at the service seams.

However, as we’ve now returned to a more manageable level, most have been able to catch a much-needed breath.

Even after everything that the sector has been through over the decades, the pandemic brought with it a fresh set of challenges that we all had to rise to, including increased tenant

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BUY-TO-LET INTRODUCER

OCTOBER 2021

Matt Hardman director, The Buy To Let Broker

demand, as well as greater requirements for space and home office needs. I believe it is important that we don’t view these changes as a fleeting trend, but as an evolution of the fundamental way that we work as a society.

The pandemic has also created an even greater split economically, between those who are struggling and those who have higher levels of disposable income.

BROKERS’ RADARS The BTL market is proudly leading the charge in offering incentives to landlords in the form of cheaper mortgages for lower-rated Energy Performance Certificates (EPCs).

However, most of these products are currently designed for landlords buying new-build property.

“In 2020, 41,700 UK special purpose vehicles were set up for property investment, another strong marker for landlord intentions” As we head quickly towards 2025, where the government’s – possibly misguided but well-intentioned – plans are to have every rented property rated as a Band C or above, the current green BTL products that are available are a very good way of managing clients’ expectations and advising them that they are missing out on at least some mortgage savings, or at the very least reminding them of their future required commitments.

I believe that all brokers right now have a duty of care to their clients to ensure that they are fully aware of the upcoming changes, and to start the discussions as early as possible in order that all clients are fully aware.

That being said, with the average cost of a buy-to-let property being upgraded to a Band C rated EPC standing at around £10,000, – regional variances aside for now – then an average portfolio could cost an investor upwards of £70,000 to £80,000 to comply.

It is therefore understandable that some are reluctant to initiate the conversations, as the savings right now – when balanced out with the cost – may not be as attractive.

Having said that, many haven’t factored in the yield increase where homes are green, as well as the reduced heating bills and a conceivable increase in demand as a direct result – although admittedly, it will take some considerable time to break even.

Brokers need to look at the wider picture, stay ahead of the legislation and analyse deals from all sides with foresight in mind.

www.mortgageintroducer.com

FEATURE

COVER “The stamp duty freeze undoubtedly increased the demand for BTL, and we have seen a huge increase in house prices throughout the period, particularly in the regions,” he adds.

“House prices have risen above 10% in areas such as Cornwall, the North East and northwest Wales, and investors seem to be targeting these more rural areas to meet demand.”

Another knock-on effect of the pandemic is that clients’ situations have become more complicated, paving the way for the specialist BTL lending market to become increasingly prominent in order to meet their unique needs.

“The pandemic has meant many clients need a solution that the high street is unable to offer, and that’s where specialist lenders come into play,” says Moloney.

“This could be a BTL or residential mortgage, where the client needs an intermediary to take a view on credit blips, or the client is looking to increase their rental yield via [a house in multiple occupation (HMO)] or multi-unit block [MUB],” he says.

WINNERS AND LOSERS On the commercial side of the buy-to-let market, the well-publicised downfall of big brand retailers has understandably made a dent in some corners, while other areas have performed surprisingly well.

“The investment risks for commercial premises have increased since the pandemic,” says Ganatra.

“This is particularly the case for offices and retails – in the Royal Institution of Chartered Surveyors’ [RICS] Q1 2021 UK Commercial Property Market Survey, a net balance of -34% and -55% of respondents reported a fall in occupier demand across these sectors throughout the UK. Unsurprisingly, therefore, vacant office and retail space increased significantly at the headline level.

“The reason is that businesses which use office space are scaling back, with many introducing agile or home working.

“Retail space – due to business rates and lack of retail footfall – is also under pressure. Industrial space, on the other hand, is holding up well, because many online retailers need small industrial units to hold stock.”

Moloney says that the market is also seeing an uptick in funding requests for industrial warehouses, due to the online shopping explosion.

However, while remote working has made some businesses realise that they do not need employees in the office full-time, Patel does not believe the UK will see a complete eradication of demand for office space.

Instead, he thinks standards and demand will change, much as they have in the residential BTL market.

He explains: “I believe there will be an increased demand for high-quality office space, which meets or exceeds environmental standards. Lower quality offices will be squeezed out of the market – offering opportunities for residential conversion – while rents at modern, purpose-built offices will stay buoyant.” www.mortgageintroducer.com

Along with these potential changes to the UK’s relationship with traditionally strong retail and office spaces comes opportunity elsewhere in the market.

“With more vacant offices and shops, particularly in the centre of towns and cities, some of these will be converted into flats,” says Brett.

“For example, the City of London Corporation is reviewing vacant office space and considering creating 1,500 new homes by 2030, which is 20% more than the 7,850 homes in that area at the moment.

“It is now easier to convert offices to residential use because of permitted development rights [PDR], where full planning permission is no longer needed. However, prior approval from the local authority is necessary, and there are rules on things like size of rooms and the amount of natural light.”

Despite the restrictions, Brett notes that landlords are increasingly interested in these types of properties, and with city centre living potentially due for a change as people realise their shifting needs post-pandemic, this could be the answer.

The effects of lockdown can also be seen in the upswing in the performance of takeaways, which Drussard describes as having become “the pinnacle of assets to lend against,” in what would have been seen as a surprise twist as recently as 2019.

He adds: “This is an area where I think specialist lenders have really set the bar, as we go into detail on each and every case to understand not just how the business has performed to date, but what the future prospects are too. That approach has meant we’ve been able to lend against property types that have been particularly underserved.”

Independent stores are another area filling the gap left by the departure of larger chains.

“More than 800 locally-run convenience stores, barbers, bakers, cafes and fast-food restaurants opened in the first half of 2021,” says Patel.

“This has driven the first rise in their numbers in four years, as they’ve benefitted from government support measures, such as business rate relief.

“In addition, consumers seem increasingly concerned with where the goods they buy come from, sustainability and supporting local businesses, so smaller retail premises may continue to be a good investment in the future.”

THE NEXT BIG THING From April 2025, all new tenancies will need to meet Band C or higher on an Energy Performance Certificate (EPC), with the same applying to all existing tenancies from April 2028.

However, improving existing stock will add additional costs, but is unlikely to increase rental returns, according to Ganatra.

“The increased availability of green mortgages does provide lower interest rates, so some savings are to be made there,” he suggests.

OCTOBER 2021 BUY-TO-LET INTRODUCER

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FEATURE

COVER In terms of other trends, much of what will come to fruition in the BTL market will also be reliant on the wider economy.

“As the economy opens up, we’ve seen the vast majority of people who took payment holidays now back to normal payment terms,” says Moloney.

“Rental demand is strong and the market is still active, so we are not seeing negative signs.

“Housing stock quality could be a factor – buyers want high standards, but building materials and skilled labour are also in demand at the moment, so we’ll need another six months to assess the effects as currently it’s too early to tell.”

While the future may be unclear, Moloney is confident that demand will continue to be strong for BTL mortgages.

“There’s going to be business coming from remortgaging as those who took out 5-year fixes, prior to the Prudential Regulation Authority [PRA] changes coming into effect, will be coming to the end of their deals,” he says.

“The rest of this year still looks very strong, and enquiries are coming in well, but we have to consider this is a very competitive market, with LTV pinch points combined with a high demand for properties and assets with a very low interest rate.”

House prices may have been climbing for several years, but there is always the potential for things to go the other way.

“In the years to come we will most likely see some sort of price correction, and how that will affect the refi world – with property at an all-time high – will be interesting,” says Findlay. “Will lenders have to stretch LTVs to accommodate?”

In the near future, all eyes will be on the Autumn Budget later this month, and what this will mean for the market.

Brett says: “The Office of Tax Simplification proposed bringing Capital Gains Tax more in line with income tax rates.

“That could mean basic rate taxpayers might see Capital Gains Tax increase from 18% to 20%, but for higher rate taxpayers the rise would potentially be much higher, from 28% to 40%.

“This would impact landlords selling property, especially if they have owned for many years.”

While there are some potential issue on the horizon, however, there is still every reason to have faith in the sector moving towards the end of 2021 and beyond.

“The main point I would stress is for intermediaries to remain very positive about BTL, as it will remain a core part of the mortgage market for years to come,” Cunnington concludes.

“The key is that it has become a more professionalised space, and with that the criteria and mortgage options have become more complex, but that merely ensures that landlords need to be working with an intermediary when looking at their mortgage options – so it is a positive for the industry.” BTL I

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BUY-TO-LET INTRODUCER OCTOBER 2021

Interest in green BTL soaring Jeni Browne director, Mortgages for Business

W

ith Extinction Rebellion bringing the capital to a standstill, Insulate Britain climate protesters blocking the M25, and the UK’s hosting of the 26th UN Climate Change Conference of the Parties in Glasgow this year, the climate emergency is dominating the airwaves.

It is also dominating the thoughts of landlords. Three in every five are interested in green mortgages, according to our research.

When we polled our borrower clients, we found that 62% of landlords would now describe themselves as interested in mortgages that reward borrowers with discounted rates for making their properties more energy-efficient and shrinking their carbon footprint.

This represents a sea-change in landlords’ attitudes to green mortgages over the past two decades. Not a single landlord who had purchased their first buy-to-let (BTL) property before the year 2000 reported that they had been interested in considering green mortgages at the time, and this only rose to 10% among those who had acquired their first BTL property in the noughties.

Given that housing accounts for such a significant chunk of the UK’s carbon emissions, it’s great that landlords have had this damascene moment and are now so interested in making greener choices – spurred on, no doubt, by the rush to meet new Energy Performance Certificate (EPC) rating rules by 2028.

Quite apart from the ethical considerations, green mortgages reward landlords with a lower rate when they actively shrink their carbon footprint.

But is the supply ready to meet demand? There are various mortgage products out there, but few are applied on completion of an energy efficiency project or applied for the lifetime of a mortgage.

A green mortgage should mean that – once the borrower can confirm they have achieved a revised energy rating for their property – the right lender would recalculate their mortgage rate at a discount.

That is a critical distinction, because much of the UK’s housing stock is very energy inefficient, making our homes a major source of greenhouse gas emissions. Improving the energy efficiency of the UK’s stock of housing is a priority in the fight against climate change.

In September, we learned that the UK is lagging behind most European countries in using low-carbon heat pumps to reduce home emissions.

Something needs to change.

Hopefully, our research will help drum up more lender supply. The UK’s largest lenders have launched a wave of climate change products, amid criticism over their slow response to global warming.

One of the big lenders launched a green mortgage last year, and we’ve seen others follow suit – but they have only offered borrowers preferential rates when they purchase an energy efficient property, rather than rewarding those improving the ecological footprint of the UK’s housing stock.

www.mortgageintroducer.com

REVIEW

MARKET

Driving towards a greener PRS Charles McDowell Tim Newman managing director – specialist mortgages, head of marketing, HTB Homeloans Zephyr

W

ith the COVID-19 restrictions behind us, I’m now getting out and about more often, so I’ve recently been looking at new car options after my current finance deal ended. After much deliberation, I ultimately decided to ‘go green’ and order a new electric vehicle (EV). It has already proven to be very useful as I cruised silently past the queues of unfortunate motorists affected by the petrol panic-buying crisis.

Along with a slight feeling of smugness, this process also led me to think about the current situation with green mortgages, which could have some profound impacts in the buy-tolet (BTL) market.

While I made the decision to switch to an EV, what’s right for me won’t necessarily work for everyone else, and there are some parallels here with the situation for landlords and lenders in the BTL market.

For background, Zephyr Homeloans is a dedicated BTL lender, serving the standard and specialist sectors. We’re keenly aware of potential growth in the green mortgage market, driven in large part by possible regulatory changes that are being widely discussed.

Current government proposals will see the minimum Energy Performance Certificate (EPC) threshold increase from a minimum E rating to a minimum C rating for all new tenancies by 2025, with the rules also expected to apply to existing tenancies by 2028.

The National Residential Landlords Association (NRLA) has estimated that almost three million private rental properties – circa 62% of the total – www.mortgageintroducer.com

have an EPC rating of D or below. The new legislation is clearly going to be a concern for many existing landlords.

For lenders, this has inspired a raft of product launches which incentivise landlords to purchase or refinance properties with good EPC ratings.

Some of these deals offer higher loanto-values (LTVs), reduced fees, or lower rates.

For landlords, such products are likely to be suitable for those purchasing newer properties, where modern construction standards mean the house will already be rated C or above. As such, many current green deals are effectively rewarding landlords already in the market for greener new-build properties.

There is nothing wrong with that approach, but what about those

“Whilst the current provision of green mortgage products will be welcomed by landlords, I’m sure we’ll see further developments” landlords with portfolios of older properties – with much lower EPC ratings – for whom such incentivised products will be out of reach?

TWO-TIER MARKET

I agree with this view, as environmental change will only ever occur when there are mass changes to housing across the country – not limited to newer, greener properties.

Although some lenders are now offering discounted further advances to fund green property improvements, the challenge for landlords is that the sums of money required to improve a property can be high.

A report from The English Housing Survey estimated that the average cost of upgrading a rental property from lower ratings to a C rating would be over £7,600, likely higher for older property types, which can also often be a lower value.

It may not be viable for many landlords to enhance their properties without seeing a return on their investment. Since few tenants will be prepared to pay a rental premium for a ‘greener’ property, the worry is that we may start to see landlords being forced to sell their lower EPC-rated properties.

We’re also possibly at risk of building a ‘two-tier’ BTL market, where those landlords who can afford new – more expensive – energy efficient properties can also access lower-priced products, whilst other landlords with lower quality, older properties are paying a premium.

If this scenario did arise, it could create prudential and conduct risk issues for lenders to consider.

SUPPORT FOR CHANGE

I spoke recently about this topic with Alex Beavis, proposition director at Sesame Bankhall Group, who said: “The demand for green mortgages is increasing, and the recent launch of new deals is great for some landlords.

By bringing more choice to the market, such products should be applauded, especially as they are incentivising positive environmental change.

“However, what’s also needed is a broader offering to really shift consumer behaviour and improve the energy efficiency of our older housing stock.”

To conclude, as a huge contributor to national pollution and greenhouse emissions, housing decisions must clearly be at the heart of the country’s environmental ambitions.

Whilst the current provision of green mortgage products will be welcomed by landlords, I’m sure we’ll see further developments in the sector.

This, alongside potential government-led grants and funding, will hopefully be enough to support most landlords in making the necessary enhancements.

Whatever happens, it will be interesting to see the roadmap unfold for the private rental sector, as we drive toward a more environmentally conscious future. BTL I

OCTOBER 2021 BUY-TO-LET INTRODUCER

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REVIEW

MARKET

Huge opportunities for property entrepreneurs Sundeep Patel director of sales, Together

O

nce the preserve of the ‘dinner party’ landlord, the buy-to-let (BTL) market has become less attractive since successive regulation and tax rises began to bite, with occasional landlords being replaced by professional portfolio investors in recent years.

Now big-name businesses have entered the private rental sector (PRS), with the intention to build tens of thousands of rental homes over the next decade. However, there continue to be some huge opportunities for property entrepreneurs.

Britain’s PRS is booming. An estimated one in five UK households rented privately in 2020, up from just over one in 10 in 2006.

Until recently, the sector has been dominated by several million landlords each owning a handful of propertie, but that could be about to change.

With a nationwide housing shortage and spiralling property prices, it’s no surprise a number of big-name businesses have announced plans to enter the build-to-rent sector. John Lewis and Lloyds Banking Group are just two hoping to acquire a combined 60,000 properties over the next decade.

WHAT DOES THIS MEAN FOR LANDLORDS?

It’s likely the big-hitters will initially focus on newly built properties, targeting land suitable for development, squeezing smaller-scale investors out.

Lloyds, in particular, has revealed its strategy for becoming the UK’s largest private landlord, including recruiting leading housebuilders to identify sites for entire new-build estates. www.mortgageintroducer.com

But success for many landlords will lie in acquiring unique properties with untapped potential – the kind that corporate bulk-buyers are unlikely to touch, but which can boast the greatest returns. We’ve already started to see more landlords targeting run-down properties which are ripe for converting into houses in multiple occupation (HMOs), especially in high-yielding student towns.

It’s been revealed that more London investors are looking to the North for just these reasons, with a recent study finding that 63% have purchased outside the capital so far this year, compared with 27% in 2009.

Office blocks and vacant high street units could also become increasingly popular for conversion thanks to permitted development rights (PDR) – allowing some changes of use and cutting red tape for developers.

This could reduce pressure on building in new areas, particularly the green belt, while creating much-needed new homes to meet government targets.

These kinds of buildings can often provide more square footage per pound, and serious savings on stamp duty, as the 3% second home surcharge doesn’t apply to commercial property.

WHAT DOES THIS MEAN FOR BROKERS?

While these investments could make a lot of sense to an experienced landlord, dilapidated properties and niche purchases can often fall foul of high street lending criteria, and may require more complex solutions.

In the same way, the landlords bringing these cases to brokers may have more complicated incomes. They might earn through their existing portfolio, as well as having other investments. They could also be a nonUK citizen, or have issues proving their creditworthiness to lenders as they are yet to build up a credit score.

SPECIALIST EXPERTISE

Brokers should be aware of specialist lenders, which will have experienced underwriters to review applications.

However, these lenders don’t simply exist to step in when there are no other options available.

At Together, for example, we have a varied suite of products which offer major benefits to brokers’ clients in many circumstances.

To get the best deal, investors often have to move fast. Waiting for a buy-tolet mortgage to be granted could be the difference between success and failure, so being able to effectively act as a ‘cash’ buyer can be a major advantage.

Specialist lenders can provide bridging loans, allowing investors to start work on the property while new, longer-term facilities to be arranged.

Portfolio landlords who have built up sufficient equity can secure their new loan against multiple properties, essentially enabling them to borrow 100% of the new acquisition’s purchase price.

We’re seeing many investors using bridging loans to finance the purchase of distressed properties, refurbishing using cash reserves, and then exiting onto a buy-to-let mortgage once they’ve completed renovations.

We also offer second charge mortgages on BTL properties, so that borrowers can leverage their existing equity to borrow again – say, to use as a deposit on another house – without having to remortgage.

Another option for clients could be to invest in a holiday let. The ‘staycation’ boom during lockdown has fuelled more interest in short-term holiday cottages, which also benefit from significant tax advantages, as these are classed by HMRC as a business rather than an investment.

There are plenty of products now available, including Together’s specialist holiday let mortgages, for investors wanting to take this route.

Whatever your client’s financial needs, specialist lenders can assess each application on a case-by-case basis to find the right type of finance for individual property investors, allowing them to seize the myriad opportunities which exist out there. BTL I

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4 ways we’re good for buy to let cases 1 2 3 4

Options available for up to 10 bed/unit HMOs/MUFBs First-time landlords with up to 6 bed/unit HMOs/MUFBs welcomed Loans of up to £3m at up to 80% LTV available Available to individual and limited company/LLPs

Our flexible criteria, paired with an experienced underwriting team who individually assess every case they receive, means we could help where others may struggle to.

Call us today on 01634 888260 or visit krfi.co.uk FOR INTERMEDIARIES ONLY Product and criteria information correct at time of print (04.10.2021)

KRFI BTL - Mortgage Introducer Ad - MKT000117-044.indd 1

27/09/2021 14:19

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HMOs can help clients diversify their portfolio CharlesMoloney Adrian McDowell group salesdirector managing director,– specialist Kent Reliance mortgages, for HTB Intermediaries

C

ast your minds back to 1996, which I know seems like a very, very long time ago now.

I reckon many of you will still vividly remember Gareth Southgate’s penalty heartbreak against Germany in the semi-final of the European Football Championships. You may also recall Oasis and Blur battling it out to be declared as the kings of the Britpop era. A few of you may even recollect Dolly, the world’s first cloned mammal, being born.

For those of you who were working in the mortgage industry back then, you may also remember 1996 as being the year that the first dedicated buyto-let (BTL) mortgage was launched.

Difficult as it might be to believe, this year marks the 25th anniversary since the introduction of a product which transformed the UK’s housing market.

Initially offered by just two lenders, the new-fangled BTL mortgage soon became increasingly popular, seemingly offering everyone the chance to become a landlord.

In the quarter of a century since its launch, the number of products available to landlords has grown massively, and now stands at more than 3,000, whilst the number of people renting properties has more than doubled, from just under two million to more than four million.

While the BTL market has changed beyond all recognition since 1996, so has the type of investor it attracts. The early years of the BTL boom were characterised by a mix of different landlord types. However, following a raft of legislation and taxation changes, the more casual type of landlord, www.mortgageintroducer.com 14:19

dabbling in the property market to boost their pension pots, has exited the market, to be replaced by a more professional breed, keen to explore new ways of growing and diversifying their property portfolios.

THE RISE OF HMOS

It’s no surprise that houses in multiple occupation (HMOs) have become increasingly popular with landlords looking for the potential to maximise their rental yields.

HMOs are properties occupied by at least three unrelated tenants forming more than one household, who share toilet, bathroom or kitchen facilities. As HMOs attract multiple tenancies, gross rental income tends to tends to outstrip single lets. In fact, according to the latest research by

reducing the risk of shortfalls and of falling behind with mortgage payments.

That’s really tempting if you’re currently renting out single let accommodation and have to worry about void periods.

However, the problem investors, and particularly first-time HMO landlords, face is they may find their choice is limited when it comes to securing the finance they need.

Their complex nature can mean there’s often more work in managing HMO properties, resulting in some lenders being more cautious, with many insisting on some form of previous letting experience.

Clients should also speak with a qualified tax adviser and seek legal advice before coming to a decision.

HOW KENT RELIANCE FOR INTERMEDIARIES COULD HELP

“The early years of the BTL boom were characterised by a mix of different landlord types. However, following a raft of legislation and taxation changes, the more casual type of landlord, dabbling in the property market to boost their pension pots, has exited the market” BVA BDRC, HMO lettings continue to generate significantly higher average rental yields compared with other property types.

The average rental yield for an HMO currently stands at 6.8% – a full percentage point more than the overall average rental yield of 5.8%.

As well as superior returns, HMOs also give landlords the peace of mind of knowing that, due to separate tenancy agreements, voids are spread and only affect a proportion of the income,

Specialist lenders such as Kent Reliance for Intermediaries have got the ability and experience to consider applications that other lenders may not be able to.

We’ve seen every scenario, and use common sense and a flexible approach which allows us to consider more complex loans, with each case individually assessed to ensure that client requirements are fulfilled.

Here’s how we could help with your HMO cases:  We’ll consider first-time landlords if they’re a residential homeowner and the HMO property is no more than six bedrooms. For more experienced landlords, we’ll consider properties with up to 10 bedrooms.  We have up to 80% LTV available.  Day one remortgages are available following the completion of any refurbishment work.  Loans between £75,000 and £3m are available, with larger loan requests considered subject to business development manager referral.  Non-trading special purpose vehicles and newly incorporated companies are accepted.

To find out more about our HMO offering, visit www.krfi.co.uk, speak with your local business development manager, or call us on 01634 888260.

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Buy to let mortgages

Top slicing explained LOAN AMOUNT NEEDED

If the loan amount a landlord needs is not available because the rental income of the property isn’t sufficient to meet our minimum ICR requirement, we can consider using surplus portfolio or earned income to support the mortgage (known as top slicing).

SURPLUS INCOME RENTAL INCOME

Our top slicing proposition has been developed to help landlords manage their buy to let properties with greater flexibility and in a way that more accurately represents their financial circumstances.

The landlords surplus portfolio or earned income can be included to reach the loan amount needed.

Rental income from the property isn’t sufficient to achieve the loan needed.

The property must meet a minimum ICR of 110% when calculated at the pay rate of the chosen product. Surplus income from the landlord’s property portfolio, earned income or a combination of the two can be used to demonstrate that the landlord could meet any financial stresses in line with our standard lending criteria.

Top slicing highlights:

Allows landlords to meet the rental cover calculation for short-term products

Greater flexibility around loan size

Provides access to properties with lower rental yield

Offered across our entire buy to let mortgage range

Precise.

Contact your local BDM precisemortgages.co.uk

FOR INTERMEDIARIES ONLY. Product and criteria information correct at time of print (04/10/2021)

04-PM-G-01 (4.1) MKT000416-037

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Could top slicing help your customers?

Roger Morris group distribution director, Precise Mortgages

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magine you’re approached by a landlord customer who, despite already owning a portfolio of eight buy-to-let (BTL) properties, is struggling to secure a mortgage for a new one they’re hoping to buy.

The landlord customer believes the new property has the potential for high capital growth, but as it’s relatively low yielding they can’t find a lender prepared to offer them the product and loan size they need.

So, if you were contacted by a customer in a similar predicament, would you know which way to turn to help secure them the BTL mortgage they need?

Fortunately, Precise Mortgages could help. If you’ve got a case that you’re struggling to place with a mainstream lender, we’re on it!

ON A MISSION

Ever since we launched back in 2010, our mission has been simple: to help those struggling to find the mortgage or loan they need as quickly and

efficiently as possible. In the years since, we’ve gone on to become one of the UK’s leading specialist lenders, with a reputation for being amongst the most forward-thinking lenders in the market.

As part of this commitment to helping customers secure the BTL mortgage, product term and loan amount they’re after, we’ve introduced a number of innovations to the market in that time.

INTRODUCING TOP SLICING

Take our top slicing feature, for example. Since its launch back in 2017, top slicing has proved to be extremely popular with brokers looking for ways to help more of their customers get the buy-to-let mortgage they need.

In case you’re not already familiar with it, top slicing enables customers to use surplus portfolio and earned disposable income in order to prove that they can meet any financial stresses on a loan application, rather than through the rental income of the property alone.

Simply put, as long as a landlord’s rental income meets a minimum 110% of the product pay rate, they can show that they can meet any financial stresses by using the rental income of

Top slicing has proved to be extremely popular with brokers

www.mortgageintroducer.com

the property, the rental income from their wider portfolio, personal earned disposable income, or a combination.

Not only could top slicing give landlords greater choice in the way they manage their properties, helping them to maximise their investment opportunities, it could also help them to achieve greater flexibility around their loan size.

Top slicing is available across our entire buy-to-let range on all eligible personal ownership, limited company, portfolio and house in multiple occupation (HMO) applications.

HOW TOP SLICING WORKS

Let’s return to the landlord customer I mentioned at the start of this article.

Fortunately, they approach you and you’re able to tell them about Precise Mortgages’ top slicing feature, and that we take into account the surplus rental income from other properties to demonstrate that there’s an ability to meet any financial stresses.

After applying for one of our buyto-let mortgages with top slicing, the customer is able to get the loan size they need, and choose either a 2 or 5-year fixed rate product.

As they’re using portfolio income to support their application, we won’t need to see any further proof of income.

You can also use our online BTL calculator to show how much surplus portfolio or earned disposable income is needed to achieve the requested loan size if there’s a shortfall. This helpful tool is available 24/7, giving you the answers you need, even out of hours.

The BTL calculator is fully integrated into our system and guides you step by step through the application process, before presenting you with the product and loan amount options that are available to your individual customer.

Not only that, you can choose to switch to top slicing if there’s a down valuation on the original application, without the need to go through the whole process again.

To find out more about how Precise Mortgages’ top slicing could help your customers, speak with a member of our sales team or call our dedicated support service on 0800 116 4385. BTL I OCTOBER 2021 BUY-TO-LET INTRODUCER

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Which ownership structure is right?

ratio (ICR) of 125%. This is less than the 145% ICR many lenders apply to individual landlord applications.

JOINT TENANTS:

Charles McDowell Emily Machin managing director – specialist mortgages, head of specialist finance, HTB InterBay Commercial

A

s a former business development manager (BDM), if I had a pound for every time I was asked by a broker about the best way for their client to run their buy-to-let (BTL) business, I reckon I’d be able to fund my own rental empire!

So, in case you’re approached by a client who is unsure of the direction they should be taking, it’s worth considering the different ownership structures, as well as the pros and cons of each type. Before we begin, though, I can’t emphasise enough the importance of making sure your client has spoken with a qualified tax adviser and has sought legal advice before coming to a decision.

INDIVIDUAL, JOINT OR LIMITED COMPANY?

Following the launch of the first BTL mortgage in 1996, for many years the most popular way to run a BTL business was as a private landlord. A personal ownership structure was the simplest way for those attracted by the promise of rental income and capital growth to look after their investment.

However, the phasing out of mortgage interest tax relief, as well as changes to taxation and legislation, has seen growing numbers of private landlords either exiting the sector altogether, or looking at different ways to run their business.

If your client is considering purchasing a buy-to-let property with a spouse or business partner, it’s essential they choose the right type of joint ownership structure that best reflects their situation. www.mortgageintroducer.com

 Each owner has equal rights to the whole property.  If one owner dies, property ownership automatically goes to the surviving partner.  For the property to be sold, both owners must first agree, and any proceeds from the sale are split equally.  Owners cannot pass on their share of the property in their will.

TENANTS IN COMMON:

 Ownership doesn’t have to be split 50-50, so borrowers can own differing shares of the property.  Property ownership doesn’t automatically switch to the remaining owner if one joint owner dies.  Once both owners agree to sell the property, the proceeds are split depending on the number of shares each owner has.  Joint owners can pass on ownership of the property in their will.

According to the latest research

by BVA BDRC, buying a new BTL property in a limited company structure is the most preferred purchase route for investors. More than half (51%) of all landlords say they intend to purchase their next rental property as a limited company, a figure that increases to 67% for landlords who already own 11 or more properties.

So why are so many landlords considering running their BTL business as a limited company? The main reasons are as follows:  The reduction in mortgage interest tax relief doesn’t affect limited company landlords. It means those choosing to incorporate can offset all of their mortgage interest against profits from their rental income.  Profits are subject to Corporation Tax, which currently stands at 19%.  Limited company applications are stress tested at an income cost

However, landlords thinking of transferring properties across from individual or joint ownership to a limited company should be aware of the costs that could be incurred.

As the properties must be legally ‘sold’, the move will be seen as a purchase, and could be liable for stamp duty, Capital Gains Tax (CGT) and early repayment charges (ERCs).

HOW INTERBAY COMMERCIAL COULD HELP

Whichever structure your client chooses, InterBay Commercial is ideally placed to help them find the right buy-to-let mortgage to suit their needs.

Our range can support a variety of property types, including converted and purpose-built houses in multiple occupation (HMOs) and multi-unit freehold blocks (MUFBs).

Our buy-to-let mortgages are available to:  Individuals – UK and EU nationals residing in the UK.  Limited liability partnerships (LLPs)  Limited companies that are UK incorporated  Holders of Self-Invested Personal Pensions (SIPPs) and Small SelfAdministered Schemes (SSAS), to a maximum 50% loan-to-value (LTV).

To give you an example of the breadth of our know-how here at InterBay Commercial, we recently completed on a facility secured against more than 400 properties in central and northern England.

A client was seeking to refinance and raise capital on their portfolio of residential properties, including flats, houses, HMOs and a block of flats.

We worked closely with the client’s solicitors due to the complex company structure to provide a tailored solution.

To find out more about how we could help your clients, speak with a member of our sales team, visit www.interbay.co.uk or call 01634 835006. BTL I

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It feels like a new year Charles McDowell managing director, specialist mortgages, Hampshire Trust Bank

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here is nothing I love more than writing a sternly worded email to my local MP. At the moment, I mostly write about YouTube videos with no ‘skip advert’ button, but I have long lobbied that we move the beginning of the year from January to September.

We’ve had our summer holidays, schools are back, new shirts have been bought for the year ahead, the harvest has been brought in, we’re fully refreshed with vim, vigour and Vitamin D, and we’re ready to kick on for the next 12 months.

This September, the same can be said for the buy-to-let (BTL) market.

We all know we’ve collectively had an incredible run up to July, mostly spurred on by the stamp duty relief.

This was then followed by what felt like the most prolonged and pronounced summer holiday period we’ve ever had.

Commentators often talk about the impact of pent-up forces. Well this August it felt like 18 months’ of pent-up leisure demand was released across the whole nation, with activity, certainly for HTB, falling as a result.

The market is buzzing with positivity

www.mortgageintroducer.com

However, as the leaves begin to turn and pumpkin spice starts to flow, the market has bounced back. Our activity levels are increasing every week.

As at the time of writing – the last week of September – our business levels over the last week have been double those for the first week in September, and there is no real isolated driver behind the increase.

Looking at the deal flows, they are the same as they were in the previous months – same ratio of purchase to refinance, UK resident to non-UK resident, the same products, the same loan-to-values (LTVs), the same average loan sizes.

It’s just as if the whole market has come back for their holiday and said, “let’s go again.”

THE UK IS MORE THAN OK

And why shouldn’t the market be buzzing with positivity? The BTL market is underpinned by the UK economy. Yes, I understand that we are going through a choppy time for businesses, and there will be some losers in the short to medium-term, but on the whole there will be many more winners.

I love this country. It continues to attract the best and most innovative talent from across the world, and is a haven for capital investment.

We should never lose sight of – or take for granted – the fact that the

UK provides a stable and secure environment with transparent and simple laws and regulations.

It is business-friendly, and if businesses thrive, then so will the property market and so will the private rental sector (PRS).

I’m not alone in this positive bubble – it is being seen across the whole market. Lenders want to lend. This is being signalled with rate reductions across the whole mortgage market.

It feels like a day doesn’t go by without a ‘lowest ever’ headline in the mortgage press.

At HTB, we resist changing our prices as we rely on service and flexibility; however, even we are not immune to market forces, and have recently announced our first rate reduction for over 12 months.

My expectation, given the enthusiasm, is that there will be a sustained big push across the market for the remainder of 2021 and we will see some strong business volumes.

NOTHING WE CAN’T HANDLE

As ever, there will be some challenges.

Winter is coming, and who knows what’s going to happen from a COVID-19 point of view.

I’m no expert, but surely if we’ve gotten through the past 18 months, we can get through the next six.

Then we have Brexit to navigate.

Now I’m not a Brexit bull, but I am certain we can make a success of it, and if we are clever, we can turn our already simple legal and regulatory environment into something even better for business.

Finally, we have the savings market, which is the source of funds for many banks. It has seen significant increases in rates over the last few weeks – admittedly from historic lows – so it will be interesting to see how this rate increase will be passed on to the mortgage market through the coming months.

These are all quite significant challenges, but all in all, I think we’ve got this. BTL I OCTOBER 2021 BUY-TO-LET INTRODUCER

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Award-winning Buy-to-Let processes Powered by technology, our Buy-to-Let deals are fast and built around your clients’ needs.

Property finance made simple.

lendinvest.com LendInvest Limited is registered at 8 Mortimer Street, London, W1T 3JJ (Company 08146929). Your client’s property may be repossessed if they do not keep up repayments on their mortgage.

For intermediaries only.

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Evolution is key to consistent success Charles McDowell Andy Virgo managing director – specialist mortgages, BTL director, HTB LendInvest

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t’s award season in the lending industry, and after a hard year’s work it’s great to see the LendInvest team being recognised in shortlists and longlists ahead of awards nights in the months to come.

After winning National Association of Commercial Finance Brokers (NACFB) Buy-to-Let Lender of the Year for the past two years, being shortlisted again for 2021’s accolade meant a lot to us as a team, because it is great feedback on our approach to buy-to-let (BTL) lending, which isn’t to sit still, but to keep working to make property finance simpler every year.

Constant evolution of our approach – be it with how we set our rates, how we improve the back-end working of our processes, or how our business development managers (BDMs) talk

The past two years have seen lots of positive change

www.mortgageintroducer.com

with clients – sits at the heart of how we maintain consistency as a lender of choice. Here’s how we do it.

TECHNOLOGY AND SIMPLICITY

At the start of this year, our operations team was struggling – record transactions, backed up by the pandemic and lockdowns, which also meant valuers were facing a huge backlog of demand, had pushed our timescales past where we wanted them to be. However, they kept delivering deals and reduced the time it took to do it.

Part of this journey was just making things simpler – we wanted experienced case managers and underwriters focusing on packaging and delivering offers.

We supported them with administrators who joined to answer phones and update brokers, freeing up case manager and underwriter time to deliver deals.

Working closely with our tech team, they identified the pain points in our process and integrated new

technologies to automate and assist with the packaging process.

Over time, this brought packaging and delivery times down drastically, and we were able to continue improving on our already tried and tested methods.

LISTENING TO OUR BROKERS

Knowing your customers is vital to any lender that wants to grow and continue earning brokers’ business.

This is why keeping in close contact, inviting regular feedback, and acting on it is so important.

We’re constantly improving our BTL criteria, and over the summer we went through a series of changes based on direct contributions from our brokers.

While criteria changes individually might feel small, when done in partnership with brokers it earns their trust that you’re listening, and opens you up to more of their business as you build your criteria around client needs.

THE PERSONAL TOUCH

Regional BDMs are as important as ever, even in a technology-led world.

Even if they aren’t able to meet faceto-face, the advantage local knowledge and understanding gives a lender working nationally is invaluable, and giving your BDMs the time to form these connections is invaluable.

When we weren’t meeting faceto-face, we made contacting BDMs through digital means simpler, adding a new finder tool to our website and giving them the space to conduct conversations and meetings.

Since lockdown restrictions have eased, the team have been back out on the road, appearing at events and meeting with customers, where comfortable, to keep the personal touch in our technology-enabled lending.

This is another area of the business that has been recognised in the coming awards season, with a nomination for BDM Team of the Year at the NACFB awards.

The past two years have seen lots of positive change to our BTL process, because whatever the challenges posed, the team has evolved to meet those and keep the fundamentals of our approach working. BTL I OCTOBER 2021 BUY-TO-LET INTRODUCER

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BUY TO LET US HELP With our knowledgeable team of BDM’s and direct access to underwriters, ensuring you get the right Buy To Let mortgage for your clients just got a whole lot easier.

Landbay.co.uk 291_LB_MortgageIntro_BLT_SUPP_FPA_v1.indd 1

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Interest in large loans for HMOs and MUFBs Charles Paul Brett McDowell managing director director, – specialist mortgages, intermediaries, HTB Landbay

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ule changes for landlords and buy-to-let (BTL) property over the past five years, particularly relating to tax, have altered the ownership of the rental sector somewhat.

By removing tax relief for landlords and adding on a 3% surcharge to stamp duty, the government’s intention was to discourage landlords from buying property. Instead, those properties would be bought by homeowners, particularly first-time buyers. Well, it has not panned out like that at all.

Property is still unaffordable for many people, and even if they could afford a mortgage, more regulation in the form of tight affordability rules has squeezed them out of the market.

What has emerged is that more professional landlords have exploited opportunities, and there is increased demand for shared accommodation in the rental sector, especially among young professionals.

The shared house student market has been buoyant for years, and a growing

There is rising interest in HMOs

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amount of it is being refurbished to a decent standard.

There is also an increasing demand for single-person accommodation, with the number of people living alone in the UK rising by 4% in the past decade.

According to Office for National Statistics (ONS) data, the proportion of one-person households in 2020 ranged from 22.8% in London to 33.6% in Scotland and North East England.

EXPERIENCED LANDLORDS

This demand has led to a rise in investors seeking houses in multiple occupation (HMOs) and multi-unit freehold blocks (MUFBs).

These properties usually have a higher yield than single houses or flats so are financially appealing to landlords.

However, they require more work and there are stringent rules and regulations to deal with. This is why they are traditionally the domain of professional landlords with years of experience.

HMOs are defined as any property that is lived in by three or more people not from the same household, with shared facilities such as the bathroom and kitchen.

Landlords with HMOs housing five or more people require a license from the local council which will stipulate conditions that need to be met. These include minimum requirements for the size of bedrooms and adequate waste disposal systems, as well as the usual gas safety and electrical appliance certificates, smoke alarms and so on. Smaller HMOs may also need a license, depending on the local council.

Despite the extra work and knowledge needed in renting out HMOs, we have been seeing a rise in interest from smaller landlords. They may have two or three single-unit properties, but want to move into the HMO space and feel confident enough with their experience to take on a bigger challenge.

HMOs range in size, with some being quite large, and at Landbay we will lend on properties containing up to 12 bedrooms. With MUFBs, we will also lend on blocks with up to 12 units.

Such big properties are expensive, especially if they have been refurbished to a high standard or are purpose built.

Some of the new purpose-built HMOs even have en suite facilities in the bedrooms, so residents just share the kitchen and communal areas.

MUFBs are usually large properties that have been converted into a number of self-contained flats with their own kitchen and bathroom. There may be communal areas such as hallways and a garden, but they all have their own personal entrance. The block will be a single freehold, but each flat has its own Assured Shorthold Tenancy.

They are mainly for single people or couples, but some flats can be larger to accommodate families.

There are also new purpose built MUFBs on the market, which should have the advantage of being energy efficient. More than 95% of new-builds now have an Energy Performance Certificate (EPC) rating between A and C, which falls within new requirements for rental properties which the government proposes to start in 2025.

Location is also an influencing factor in the cost of HMOs and MUFBs, with city centres commanding higher prices.

LARGE LOANS

Invariably, large loans are needed, which is why Landbay has introduced a new range of competitive, larger BTL mortgage products for up to £1.5m.

Our new large loans range is not just limited to HMOs and MUFBs. There are also products for standard property and new-build, as well as for small portfolio landlords with four properties or less, and trading limited companies.

Since we launched this product range at the start of September, we have had strong interest from landlords wanting to buy HMOs and MUFBs between £1m and £1.5m.

They are a lucrative investment, and even if any of the rooms or flats are vacant, the landlord still generates income from the other tenancies. BTL I

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The evolution of BTL and green mortgages Charles McDowell Andrew director managing Ferguson – specialist mortgages, managing director, HTB One buy-to-let West

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t is now 25 years on from the launch of the very first buy-to-let (BTL) products, and the private rental market is going from strength to strength.

Back in the 1980s and 1990s, the proportion of private rented households was steady at around 10%. By 2020, the number of households occupied by private renters had almost doubled to 19%, standing at 4.44 million, according to Statista.com.

It is not hard to see why. While consecutive governments have tried to make it easier for people to get on the housing ladder, for many this is something they neither want to do, nor realistically will be able to do.

The demand for private rental properties has therefore soared, and with it, rents have too. In the past 20 years, Statista reports that aggregate annual rental costs paid by tenants have increased on a yearly basis from £27bn in 2000 to £86bn in 2020.

Add to this a trebling in the growth of house prices over this time period, and it’s easy to see why landlords want to invest.

Recent analysis by Halifax reveals that the average price of a home has risen by an incredible 207% in the last 20 years. In Greater London, the rise has been even more steep, up by 239% since the millennium. These are the types of returns that are rarely available on the stock exchange.

Perhaps unsurprisingly given that backdrop, the Intermediary Mortgage Lenders Association (IMLA) predicts that the BTL mortgage market is likely to exceed £40m this year, with a similar forecast in 2022. www.mortgageintroducer.com

THE ADVENT OF GREEN PRODUCTS

Now the private rental sector is evolving again, and maybe it is fitting that this is happening on its 25th anniversary. There has been a huge launch of green BTL mortgages this year. This comes on the back of changes announced by the government, that address the need for a concerted effort to make the UK housing stock more environmentally friendly.

An estimated 15% of all UK emissions come from our housing, and the government wants that to change.

Ahead of hosting world leaders at the Glasgow climate summit in November, our government declared that all rented houses need to reach an Energy Performance Certificate (EPC) rating of at least C by 2025. For existing tenancies, the date is 2028.

“Brokers have an important role in making their landlord clients aware of the forthcoming legislation, and that they can pay a lower interest rate when their properties do reach a C rating or above” Currently, landlords need to achieve a rating of E, so a significant number are going to need to invest in their properties over the next couple of years to bring them up to the required standards, or else they risk not being able to let them out.

Lenders, such as West One, are playing their part in this by launching lower cost ‘green’ mortgages to reward landlords who have brought their properties up to the required standard.

This is about making a positive impact where we can as a company –

and encouraging landlords to do the same, while also complying with the government legislation.

We all need to make the changes we can in order to have a positive impact on sustainability and carbon reduction, particularly with the housing market being a key contributor to emissions.

Brokers have an important role to play, too, in making their landlord clients aware of the forthcoming legislation, and that they can pay a lower interest rate when their properties do reach a C rating or above.

There is no time to lose in these upgrades, either. While 2025 may feel like it is a long time in the future, upgrading properties is often not an overnight job.

There are a lot of people choosing to improve their properties rather than move at the moment, and there are many tales that it is taking up to a year to get a good quality builder. If a landlord waits a year or two before even starting to upgrade their properties, and it then takes a year to get a builder, then they will be in danger of not completing any improvement works before the 2025 and 2028 deadlines.

We have yet to see how the government and various regulators will respond to landlords who have not achieved a Band C rating, but potential penalties must be a situation that most landlords want to avoid, so there is no time to lose.

Michael Gove as the new Housing Minister may also shake things up. Not someone known to let grass grow under his feet, it is highly likely that landlords will be faced with more regulation rather than less.

There has been much furore over the past few years about ‘rogue landlords’ and poorly maintained properties; it is highly likely, therefore, that this will be a focus for our latest housing minister – along with the building of an extra 300,000 houses a year.

Improving the environmental standards of properties, as well as general living conditions, is likely to be a given, so the sooner landlords start the better. The launch of green mortgages is a step in the right direction by lenders to help those landlords who do the right thing. BTL I

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Chasing demand Jessica Bird outlines Buy-to-let Introducer’s round-table discussion on lending appetites, changing tenant demand, and the future for this market

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he events of the past year and a half have had seismic effects on the daily lives of the UK population, such as the shift to remote working, the rise of online retail, and the ‘race for space’ leading many to head out of cities in search of gardens and square footage.

Buy-to-let Introducer’s recent round-table gathered experts from Zephyr Homeloans, Together, OneSavings Bank (OSB), Hampshire Trust Bank (HTB), LendInvest, Coreco, LandBay, Goodlord, Specialist Money Group and Getground in order to discuss how the buy-to-let (BTL) market has fared through all this, and what can be expected down the line.

CITY LIVING One of the prevailing discussions since early in the pandemic has been shifts in what UK residents want from their homes. The rise of remote working, which looks set to continue in some form for many organisations even as the world returns to normal, has led people to consider the need for dedicated offices.

Meanwhile, spending long tracts of time at home has raised questions of space, both inside and outside.

At least temporarily, the traditionally bullish London rental market became less desirable. With no need for easy commuting and increased appreciation for room, light and greenery, commentators prophesied a mass exodus from the UK’s city centres.

However, as the world looks towards life postpandemic, it does seem that these trends are settling, and in some ways correcting.

Andy Virgo, BTL director at LendInvest, says: “We’ve definitely seen a change over the last 18 months in the

number of properties coming in to us that are outside of city centres. But I wouldn’t go so far as to say it’s a mass exodus, and now we are starting to see a change again, with city centres coming back up again. There will always be demand for city centre locations, and as staff come back to offices and the shops start opening, there will be more people required to work in retail again. There’s a certain stability starting to return.”

Sundeep Patel, director of sales at Together, adds: “We’ve noticed trends, particularly in the first lockdown, where outdoor space is more in demand. Landlords are chasing where the demand is for tenants. But it is getting a bit more back to normal in London – we’re seeing shops opening up again.

“The lifestyle trend is for some going to be permanent, but for a lot of people the benefits of city living will lure them back in, particularly if there is a supply of property available because of that exodus, they might find that rents are actually more affordable. It will just be a matter of time before we start seeing that pick up again.”

Oli Sherlock, director of insurance at Goodlord, says that there was a time when rents started to go backwards in London, but that this has started to bounce back, according to the business’ tracking data.

While some have predicted that, at the very least, the lessons from the pandemic around space would place city-based flats low in the pecking order, Sherlock in fact cites this as the highest growth area within property viewings in May, up by 17% compared with January.

This, he adds, was fuelled in particular by firsttime buyers (FTBs): “Wherever there is a gap created, there is another demographic that wants to take the

We’re specialists in BTL Client wanting to purchase a flat above a launderette.

- We lend up to £750k at 75% LTV on Flats Above Commercial. zephyrhomeloans.co.uk

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BUY-TO-LET opportunity to fill that gap. Rents are rising in cities, and tenant demand has remained on the up throughout since the bounce back last year.”

Charles McDowell, managing director, specialist mortgages at Hampshire Trust Bank, explains that some of the seeming exit from city centres might have been a matter of foreign workers returning home during the pandemic, as well as a reduction in tourists affecting landlords with short-term lets.

“The thing people need to appreciate is that when you are investing in real estate for capital values, it is a long-term game,” he adds.

“But when you are looking at purely rental yields, this is a short-term market, impacted by short-term trends, and clearly we’ve had some significant short-term trends flowing through the rental markets.

“I would say to everyone, you just need to calm down. This is not a mass exodus, people will come back to the cities.”

Jeff List, founder of Specialist Money Group, adds that with students returning to cities as in-person education returns, there will be a further influx of prospective tenants to boost the market.

Paul Fryers, managing director at Zephyr Homeloans, adds that the housing stock shortage across the UK, as well as confidence in the vaccine roll-out, will also prop up demand in cities.

Andrew Montlake, managing director at Coreco, agrees that lack of stock means that while tenant preferences may shift, there is little chance of a dearth of demand. In fact, the risk is that if rents rise too strongly, this might price out the all-important next wave of city renters.

“You’ve got a whole generation of people who don’t want to live at home, and the rental market will be absolutely key, so things will calm down,” he says. “As brokers, we’ve got a big role to play in the future of

“We’ve noticed trends, particularly in the first lockdown, where outdoor space is more in demand. Landlords are chasing where the demand is for tenants” SUNDEEP PATEL

“There’s been an onward march of professional landlords building portfolios that are able to withstand risk” PAUL FRYERS

the BTL market as things open up again. It’s going to be business as normal pretty soon.”

POST-PANDEMIC TRENDS While concerns about changing tenant demand appear to be somewhat unfounded, Virgo says that there will likely be some changes to how landlords approach property investments, with a shift from building up portfolios in their local area, to going further afield to find places with the kind of space and amenities that will appeal more to tenants in the future.

This includes moving into areas of growth such as the North and North West, where they can achieve higher yields for lower investments.

“It’s very important that brokers dealing with those landlords make sure they understand that if they’re buying in an area they’re not familiar with, they need to be a little more vigilant and stay even closer to their tenants,” he adds.

Sherlock says: “A recent study by Hamilton Fraser found that 65% of landlords don’t use a letting agency service. If you’re looking for a property further afield, it becomes a lot harder to manage and ensure that the yield is coming back to you. So the ecosystem and how this works is important to note.

“The fact that there’s also more compliance and regulation coming down the track means it will be interesting to see how landlords self-manage.”

Moubin Faizullah-Khan, founder and CEO of Getground, points to the onward march of digitalisation as another key trend to consider as a result of the pandemic.

“Even within the BTL sector, people were being forced to view houses online and with videos, to use technology-centric tools to manage their accounts or set up companies to purchase their investments through,” he explains. →

We’re specialists in BTL

Client selling a property in to his Limited Company SPV with 41 properties already in the portfolio.

- We don’t cap the number of properties held in the SPV and stress test at 100%.

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“Two in three landlords said they are going to get their EPC up using savings. It creates an opportunity for brokers to reach out and educate them” NATHAN GOODRIDGE

“That’s going to influence a number of ways in which BTL investors look at the market. People are now more comfortable buying property that’s not close to where they live, going further afield. That’s going to be one of the bigger trends that lasts quite a bit of time.”

HIGH STREET RENAISSANCE COVID-19 saw UK consumers turn in greater numbers to online retail, while cafes, pubs and other hospitality spaces shut their doors, either short-term or, in some cases, permanently. Nevertheless, while there have certainly been some notable downfalls among big retail brands as a result, rumours of the ‘death of the high street’ may have been overblown.

Now, with lockdown eased and people returning to more normal shopping and socialising habits, strength and activity does appear to be returning, which is good news for the non-residential buy-to-let market.

However, this resurgence does not counteract the fact that long-term changes have been wrought as a result of the past year and a half, some of which were already an inevitability.

List says: “We’ve certainly seen a change in the type of asset BTL landlords are buying. It’s an under-served side of the market, especially in the semi-commercial and multi-unit freehold block [MUFB] space, where you’ve got commercial units with flats above.

“Historically this has been sat in the specialist lending space, among more commercial-type lenders, but as brokers we hope that that space will open up.

“An MUFB tends to be a no-go if there’s commercial units on the ground floor, but with changes to permitted development [PD] rules it should be a good asset for a lender as well as a landlord.”

He explains that, while some might be put off by uncertainty around commercial tenants, these properties are often viable based on the residential rents alone.

Patel says that semi-commercial and commercial has been Together’s biggest growth area for the past several months, while List has also seen a substantial increase in enquiries.

“The high street commercial banks stopped lending and it created a niche opportunity for specialist lenders,” Patel continues.

“We’ve prudently continued to lend in that space because there’s landlords who have been doing this for 20-plus years, they know what they’re doing and how to make money out of these assets.”

While the demise of certain large chains in retail may have seemed disastrous, the fact also remains that independent shops and smaller businesses have space to thrive post-pandemic, as people are eager to get out, socialise and support these businesses.

“What we’ve actually seen is a renaissance,” says Montlake. “People are more aware of their locality, they want to support their local shops, and actually shops are thriving. We are seeing a lot more enquiries on this in city areas, and it’ll be interesting to see what some of the bigger buildings can be turned into. There is going to be a really interesting dynamic and a good mix between commercial and residential.”

Nathan Goodridge, corporate account manager at OSB, adds that this is a prime opportunity for brokers to acquaint themselves with the new PD changes, local licensing for houses in multiple occupation [HMOs], planning permissions and updates from lenders around elements such as bridging and development finance.

RESIDENTIAL BOOST With an increase in boutique, independent shops and social spaces, and the potential for conversion to either part or fully residential schemes where business have left vacant properties, the image of the UK’s high streets may well be changing.

“This remains a really solid sector, there’s just a flight to professionalism, and this is not a bad thing – this is a serious business” CHARLES MCDOWELL

We’re specialists in BTL

Client with background portfolio where over half of the properties are on the same road.

- Not an issue as we look at our exposure within a block or postcode area, not the clients.

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“The best landlords out there are the ones that know their tenants well, have a very open relationship, and for whom nothing is a surprise” ANDY VIRGO

Alex Witham, regional account manager at LandBay, says: “The matter of conversions from office and retail space to residential is something we are certainly seeing.

“It’s no surprise that some offices and pubs have fallen victim to businesses vacating leased premises, so that’s an opportunity for investors to convert them.

We’ve seen an increase in consumers purchasing these assets in the last six to 12 months.

“I do, however, think landlords need to be a little bit cautious with the future regulatory changes on [Energy Performance Certificates (EPCs)]. In 2025, the EPC rating needs to be C or above. If they’ve purchased with their eyes half closed, they could be unwittingly stepping into hot water.

“So there will be opportunities for landlords to purchase vacant commercial properties – you get a lot of bang for your buck in that area – landlords just need to remain cautious.”

McDowell also notes that this is not necessarily a simple or universal solution to the problem of vacant spaces, or indeed the housing stock crisis. Although he says that, for the right landlord and the right developer, this can be a strong route to go down, there are issues that can play out in the long term.

“When PD rights came out seven years ago in terms of moving offices to residential, everyone said it would really solve the problem,” he explains.

“A number of those schemes are at the end of their 5-year fixes at the moment, and what we’re seeing is that some have not held their value, issues have come out with them.

“There have been a number of borrowers who have managed their way through that, because they’re very experienced landlords with solid portfolios, but equally some borrowers are in quite a sticky situation.”

For the current matter of commercial to residential conversions, he warns that many units are not well set

up for residential use. For example, often these spaces are deep buildings with natural light only on one side.

Fryers agrees: “It’s a case of having your eyes wide open if you’re going to purchase an apartment in what was an office block. When we get presented with opportunities to lend on this sort of stuff, things like natural light are a concern. It’s a case of landlords really doing their homework and getting into what the case might be in five years’ time.”

SUPPORT SYSTEMS With the furlough scheme having come to an end, the UK is waiting to see whether unemployment figures will shoot up in the absence of the support.

With this comes the potential for rental arrears that could have a clear effect on the BTL market.

Sherlock says that even with the job market cushioned by government support, Goodlord has seen a clear spike in claims against unpaid rent, driven by the pandemic. However, he does add that early predictions from some outlets of as many as 50% of renters failing to pay clearly did not come to fruition.

“We don’t think that furlough is driving towards a massive pitfall along the way or is going to cause huge upheaval,” he continues. “Only because the cyclical nature of property, and the amount of time it’s taken to get from when the issues started to where we are now, has rooted out tenants who can’t afford their homes – if people are still on furlough, they have more than likely downsized or tried to accommodate their financial circumstances.”

Nevertheless, the past year and a half has made it clear that the future is unknown. Virgo says that the market should at least be mindful of the concern that rising unemployment and rental arrears could happen, but maintain the hope that the sector and the job market will continue to be resilient. →

“What we’ve actually seen is a [high street] renaissance. People are more aware of their locality, they want to support their local shops, and actually shops are thriving” ANDREW MONTLAKE

We’re specialists in BTL

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BUY-TO-LET He adds: “What’s key from a lender’s point of view is brokers talking to their landlords about sticking as close as possible to their tenants and communicating with them at all times, understanding what potential bumps in the road might be coming.

“The best landlords out there are the ones that know their tenants well, have a very open relationship, and for whom nothing is a surprise.

“Professional landlords are a resilient bunch, and those with a strong portfolio can have some wins and losses.”

Even with a potential rise in unemployment and financial complexities following the close of furlough, Witham points out that the private rental sector (PRS), and more specifically shared accommodation, is still one of the cheapest routes to housing. LandBay has, along this same point, seen increasing interest arise around HMOs. “Landlords have been aware of the potential issues and have been looking to diversify their stock, not just in terms of holiday let and commercial, but also HMOs,” he explains.

However, Witham also warns that tenant demand for HMOs might not be strong, as people are less willing to share communal spaces, for example.

He says: “To this end, we’ve noticed landlords spending more time, money and effort on making HMOs more comfortable, rather than trying to cram people in and just meeting the minimum bedroom size.

They might lose a bedroom, but gain long-term tenants.

“If the end of furlough does bring issues with tenant income, HMOs are a great fallback.

“Not only are they cheaper for tenants, but also an investor has to look at spreading their risk, unlike if all of their portfolio is single-let properties.”

GREENER PASTURES In an effort to meet ambitious targets for carbon neutrality, the UK government has put pressure on the PRS to meet certain standards in terms of EPCs. From 2025, all newly rented properties will be required to have a certification of Band C or above, while existing tenancies have until 2028.

Virgo says that lenders have a role to play in moving the PRS towards a greener future: “Lenders need to foster market conditions that really incentivise and

“There will be opportunities for landlords to purchase vacant commercial properties – you get a lot of bang for your buck in that area – landlords just need to remain cautious” ALEX WITHAM 30

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“For ‘accidental’ landlords, the challenge is that the processes presented to landlords are huge now. From a compliance perspective alone, that journey is not easy to master” OLI SHERLOCK promote environmentally beneficial behaviour from borrowers,” he explains.

“It goes beyond just rewarding people for having a great EPC rating. The real issue is the older, less environmental stock, where circa 50% of properties have EPC ratings of D or worse.

“So how do we help landlords improve these properties? We need to drive education wherever possible that people need to jump on this now.”

Some lenders in the short-term market offer products, including bridge-to-let and refurbishment loans, which can support landlords in making the necessary changes.

Virgo adds that the market must also be “mindful of the social considerations,” and look at how to avoid creating a new wave of mortgage prisoners who in the future are unable to source products due to their property’s EPC rating.

“It’s not just about finding cheaper finance, it’s about finding a way to encourage changing behaviours across the term of a loan,” he adds.

Goodridge says that advisers should be taking this as an opportunity to touch base with their clients, as this will affect landlords across the board.

“We did a survey where we found that only six out of 10 landlords actually understood or knew something about EPCs,” he explains. “Savills also says 70% of properties around the UK are actually rated D or below.

It is an opportunity to have that discussion.

“In our report, two in three landlords said they are going to get their EPC up using savings, but if we look at how cheap lending rates are at the moment, it creates an opportunity for brokers to reach out and educate them on the changes coming through.”

For example, Goodridge says that Precise Mortgages, part of OSB Group, has a refurb-to-let product which provides the option to buy EPC-failed properties and carry out the necessary work.

McDowell notes that environmental concerns are increasingly moving up the agenda for the Prudential Regulation Authority (PRA), and so this issue will land in lenders’ laps even more in the future.

To this end, he confirms that climate change risk is top priority for HTB, even while market issues stemming from the pandemic still linger.

For List, making the move to more environmentallyfriendly rental properties is not just about meeting www.mortgageintroducer.com

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BUY-TO-LET government criteria and working towards a greener goal, it is also part of improving the overall quality of the UK’s stock, and of living conditions for tenants.

Fryers adds: “Investors in the securitisations we ultimately exit the mortgages through – their interest in the [ethical, social and governance (ESG)] issues and social consciousness of firms like ours is increasing massively. So there’s absolutely a part for the mortgage market to play.”

On the new-build side, Patel explains that Together has focused on working with developers to ensure that high standards are met with new stock coming into the market, as well as modernising existing stock.

He adds: “We’re also educating a lot of our lending partners about utilising other tools – not just BTL mortgages but also second charge and bridging, for example – because rates are low across all product ranges at the moment.

“There’s a responsibility on everyone from the landlord right up to the lenders, but it’s an education piece so that we’re all on the same hymn sheet.”

PROFESSIONALISING THE MARKET The State of the Lettings Industry report, released by Goodlord and Vouch in September, found that 83% of respondents had seen tenants leave the sector over the past year, while 64% said the coming year will likely bring more attrition.

In explaining these concerning figures, Sherlock says: “First of all, house prices have rocketed, so anyone teetering on the edge of leaving will have had the push to sell.

“The other side is that for a lot of the more ‘accidental’ landlords, the challenge is that the processes presented to landlords are huge now. From a compliance perspective alone, that journey is not easy to master and it’s ever-changing.”

He adds that, following the uncertainty that circulated during the pandemic, long-term confidence has been low among landlords.

Zephyr Homeloans’ own data backs up the concern that landlords are exiting the market in higher numbers, and Fryers says: “It’s not wholly a surprise when there’s been a bit of an onward march of professional landlords building portfolios that are able to withstand risk.

“Landlords with one or two properties, in comparison, have perhaps been cashing their chips in. The growth of the professional landlord will continue.”

McDowell agrees that while landlords may have been exiting the market, this is more a sign of the professionalisation of the industry, rather than it diminishing or weakening.

“Yes the numbers have been falling, but the actual percentage share of the PRS in the housing market has remained relatively stable,” he explains.

“This remains a really solid sector, there’s just a flight to professionalism, and this is not a bad thing – this is a serious business.” www.mortgageintroducer.com

“An MUFB tends to be a nogo if there’s commercial units on the ground floor, but with changes to [PD] rules it should be a good asset for a lender as well as a landlord” JEFF LIST However, Sherlock warns that while this increased professionalisation is not an issue in itself, if demand continues to increase at the pace seen recently, with the overall number of landlords falling, this could become a problem in the long run.

Faizullah-Khan agrees that pressure has been growing for BTL investors in terms of regulation and compliance.

However, he adds: “I also think there’s a lot of tools that have been brought into the market that are going to help them deal with those issues.

“Just look at how adaptable these investors are – five years ago 15% of BTL properties were bought through a company, today it’s 65%. This is an adaptable group of people who are financially savvy.”

He adds that while some more casual landlords may be exiting the market, BTL assets are going to continue to be an attractive investment prospect well into the future.

Looking to this future, Witham says: “One of the key challenges will be for brokers to keep up with how competitive the market is at the moment. The amount of rate change, product change, new innovations and initiatives being launched is of course a fantastic sign of a very buoyant market.

“It presents an opportunity for brokers to liaise with BDMs, because it’s a time when the market is changing, tenant demand is shifting, and landlords are becoming more professional, which of course requires more detailed underwriting.

“Going forward, I would encourage brokers to touch base with specialist lenders and those that they perhaps may not use as regularly, to ensure that when that customer does become a big portfolio landlord, they’re not unsure what questions to ask.” BTL I

“Five years ago 15% of BTL properties were bought through a company, today it’s 65%. This is an adaptable group of people who are financially savvy” MOUBIN FAIZULLAH KHAN BTL I

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Lessons learned Jessica Bird speaks to Paul Fryers, managing director at Zephyr Homeloans, about the business’ growth, key lessons from the pandemic, and BTL trends going forward

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ephyr Homeloans, part of Computershare, launched three years ago, meaning that a large proportion of its journey has been spent under the pall of COVID-19.

Paul Fryers, managing director at Zephyr Homeloans, says: “It has been a very interesting three years. Like a lot of new companies, we found the first year the toughest. We learned a hell of a lot, refining and tuning what we initially set out with. Then we had the pandemic to deal with.”

The business was set up to deal with complex cases, such as those involving limited companies and shareholder structures.

“We come across quite complex situations, so being clear and helping the broker to understand what is needed as early as possible is really important,” Fryers continues. “We’ve put a lot of time into being clear about requirements, and our regional sales managers spending time with brokers on complicated cases.”

With the agility of a young business, a year of finetuning, and the established structures of Computershare supporting it, Zephyr stood in prime position to weather the pandemic storm.

Fryers says: “Going from what was effectively a new lending environment to the market closing for a period of time, and then moving into providing payment deferrals and so on, we had great infrastructure around us, which was really positive.

“We handled what was thrown at us well, and I think the mortgage market generally did as well. All lenders stepped up to the plate in testing circumstances.”

LESSONS FROM THE PANDEMIC When the pandemic hit, Zephyr reigned in its appetite around loan-to-value (LTV) limits, but pushed these back up in the second half of 2020 – altogether the business experienced a pause, rather than a wholesale restructuring of its processes.

“There were a lot of really good results, and we’re proud of the way we looked after our customers,” Fryers adds. “All at the same time as having to change to working from home.”

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Paul Fryers

In fact, Fryers notes that the success of this change to home working for Zephyr has led to a significant percentage of employees looking at making this a permanent feature of their contract. Tied in with this, the business boosted its use of online and digital tools in order to maintain a collaborative approach to complex cases.

Fryers says: “There is a need for face-to-face conversations, for sure, but if I look at how the business has performed, being remote has worked very well. The tech platforms have held up very well.”

However, he notes that it is important to remember that efficiencies are not the only focus, and that providing the opportunity to return to the office is an important factor in supporting employees’ mental health, as remote work is not for everyone.

“Through good management structures, good risk and control frameworks, and usage of technology, we’re able to deal with the workload efficiently, no matter the complexity,” Fryers explains.

BUSINESS VALUES Through the vast change of the past year and a half, and while growing as a new business, Zephyr Homeloans has centred on the fundamental tenets established by Computershare: certainty, advantage and ingenuity.

“Within that, there’s a range of behaviours that all of our colleagues work to, and the engagement and management framework is based around those values,” says Fryers.

Meanwhile, Zephyr’s approach to lending is founded on deep, specialist experience and understanding, as well as a bespoke attitude to underwriting.

Fryers explains: “We have people who have been through various cycles and got some very deep understanding of the market. We have seen what’s worked well before, and what’s not worked, and created our proposition and approach based on that business understanding across a broad range of circumstances.

“Our sales team is expert, and gets great feedback from brokers on its level of understanding. On the underwriting side, we look at each case on its own merits. www.mortgageintroducer.com

SPOTLIGHT

ZEPHYR HOMELOANS MARKET TRENDS There is no doubt that the pandemic has had longlasting effects on all elements of the UK economy, and the BTL market is no exception. For example, the stamp duty holiday has fuelled incredible amounts of business transactions, following the initial pause incurred when lockdown first came into play.

“The market has been exceptionally buoyant since the first lockdown,” Fryers explains. “Underlying support for the economy in the guise of the stamp duty holiday either brought forward decisions that people might have made in the future, or unleashed pent-up demand that arose because of the first lockdown.”

A further trend that Zephyr has noted as a result of the events of the past year or so is the ‘race for space’ as people move out of cities in search of more square footage and greater access to the outdoors. However, he is currently seeing something of a correction, with the younger generation still seeing the pull of cities.

From Fryers’ perspective, this is a market in constant flux as people’s wants and needs change. Whether or not demand in central cities does rebound fully, the fact remains that the pandemic has spurred on a certain diversification in terms of tenant – and therefore landlord – demand. For example, he suggests that the pre-pandemic trend of landlords looking for higher yield in new parts of the country will likely continue.

As part of this search for higher yields, Fryers notes that good quality houses in multiple occupation (HMOs) will continue to be a particularly strong trend.

Looking further into the future, Fryers sees the current growth of green products as something that will only increase as the 2050 marker draws closer.

“All sectors have a part to play, and certainly you can see how the energy efficiency of properties in the private rental sector [PRS] is going to become an increasing issue. It’s a complicated situation, with a lot of stakeholders, and if you think about retrofitting older properties, the cost is going to be fairly big.

“A solution around that does need to be found, and the government is consulting on the subject. The mortgage market’s got a part to play, and we’ll see how it plays out across all the moving parts.”

In part due to the rising cost and complexity of elements such as retrofitting and energy efficiency, as well as taxation, one trend that has been growing of late is the professionalisation of the BTL market, with smaller, one-off landlords giving way to portfolio investors. Fryers says that, while there is always a role for smaller landlords in the market, with property price inflation trends the way they are, this might be the best time for those one-off investors to realise a strong return.

“For a little while there’s been a professionalisation of the sector going on, with landlords who are looking to build business in the longer-term adding properties to their portfolio,” he says.

“What scale does bring is a degree of ability to withstand shock, and invest as well.” www.mortgageintroducer.com

In terms of other trends for Q4 2021, Fryers says the staged phasing out of stamp duty has already seen transaction numbers slow, while property prices are starting to “come off the boil a little bit.”

Overall, while there are many elements of change in the market at the moment, Fryers maintains that it is well placed to withstand them.

“No matter what’s thrown at it, this is a resilient type of investment,” he continues.

“It’s often been mentioned that BTL is looking into a storm, but it seems to be weathering it very well, and there’s an incredibly resilient type of investor behind it.”

BALANCING TECH Property finance has progressed significantly in its relationship with tech, spurred on by the pandemic, but for Zephyr, this was always part of the fabric of the business. For portfolio cases, for example, Zephyr has upload capabilities to do rental automated valuations (AVMs), which Fryers says is particularly helpful in streamlining more complicated cases.

However, he adds: “What we shouldn’t forget is that we come across a whole range of circumstances, so actually we do need to have people taking decisions, whilst utilising technology for automating certain tasks.”

The important thing, Fryers continues, is to find an effective mix of the two. However, he does not believe that the onward march of technology and digitalisation will stop any time soon.

“You can see it continuing to develop,” he says. “It’s all part of our reason for being, to utilise technology as well as we can, and enhance that broker and customer journey. We get some great feedback on the combination of the technology platform and our people, that complex mix creates a good service for the broker and the customer.

“We’re all trying continuously to do things better, that’s the bottom line, and whether that’s through technology or the more traditional processes, it’s a mixture of the lot that ultimately creates a good outcome for the customer and broker.”

ZEPHYR’S FUTURE Zephyr’s strategic intent is to grow in a material way, which also means looking at how it might expand its proposition into the broader BTL market.

As the business expands, Fryers’ message to brokers who have yet to work with Zephyr is that its people are ready and willing to welcome new conversations.

“We’ve got great depth of understanding about buyto-let mortgages and what requirements we have to help you get a good outcome,” he concludes. “From a product point of view, we’re highly competitive and have established ourselves well among the pack of specialist BTL lenders. In terms of service, we publish everything very transparently, and there’s a significant service machine behind the business to give you the service that you and your client want.” BTL I OCTOBER 2021 BUY-TO-LET INTRODUCER

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Tips and tricks with BTL affordability Charles McDowell Liz Symsdirector – managing specialist mortgages, CEO, HTB Connect for Intermediaries

T

he UK Finance Q2 2021 mortgage market review highlighted that more buyto-let (BTL) investors have been remortgaging and raising equity from their existing properties.

Despite reservations, it would appear that property prices are not likely to fall, and in the longer term, will still rise as demand continues to outstrip supply. Expectations also continue for solid tenant demand and in areas further from town and city centres due to home and hybrid working.

Property investors look to benefit from capital growth and rental income, so it is an incredibly positive time for investors to consider expanding their portfolios.

Investing in high yielding property such as houses in multiple occupation (HMOs) or lower value properties in the North rarely causes an issue with BTL affordability. However, areas such as London, according to data from Hamiltons and the Land Registry, have over the last nine years benefitted from 80% of the total returns coming from capital growth and only 20% from rental yield.

It is properties such as these that may benefit from help from a specialist mortgage adviser who can guide the property investor on the best way to structure the loan to maximise the amount of borrowing.

The PRA introduced the BTL affordability rules in 2016 to ensure that BTL mortgages remained affordable if rates rose and that landlords had also budgeted for costs for running the property. Expenses included the rising tax bills for higher

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rate taxpayers, as offsetting the mortgage payments against the rent is now restricted to basic tax rate relief.

For a higher rate taxpayer, with no other exceptions applied, the lender needs to calculate how much the mortgage payments will be if interest rates rise to 5.5%. A lender would then typically require the rent to be another 45% on top of this to cover the costs.

The PRA did allow the lenders to apply some exceptions. Like for like remortgages do not need to be calculated in the same way, but this excludes capital raising. A client could take five years or more on a fixed rate, and as this rate will not be rising in the medium term, the PRA allows the lender to use the actual rate taken. This calculation method is optional and is not adopted by all lenders. Specialist BTL lenders in the main fully embrace this exception, meaning a lower rental requirement.

Properties held inside a limited company are not subjected to the BTL tax treatment, and for this reason, lenders will often use a lower margin to cover costs, typically 125%, as there will be less tax to pay.

In the below example, you can see that by just structuring the mortgage a different way, e.g. by taking a five year fixed rate and buying the property inside a Limited Company, the amount of rent needed for the same client on the same property is nearly £1000 less.

Most lenders have a rental calculator on their website to help an adviser calculate what that lender can offer.

Legal and General have just released Smartrfit for BTL affordability, which takes away some of this headache as advisers can search up to 16 lenders affordability in one place.

If the client is a portfolio client, a rental calculation must also be applied to all the background properties.

How lenders apply the stress test on the background portfolio does vary from lender to lender. Some use the same calculation basis as the subject property and others something completely different. If, after doing the calculations, you find that it is just not fitting, other options can be considered.

For example, there are lenders with alternative calculations methods, such as using 140% coverage for a higher rate taxpayer instead of 145%. Some lenders are not authorised by the PRA and therefore do not strictly follow their calculation rules.

Top slicing is another option. Surplus earned or rental income could be used to make up a shortfall. Many lenders offer this solution, but there are various nuances, so it’s worth reading the small print. Considering property that generates higher yields, such as holiday lets or HMO property, is also a popular alternative with landlords.

Equity raising activity is currently high. It is worth noting the changes coming down the line for EPC ratings, which will require properties to have a rating of A, B or C. Significant numbers of landlords are likely to need to do renovations to their properties to meet this target, so I can see no slowing down of property investors capital raising for the foreseeable future. BTL I

Structure

Interest rate selected

Actual monthly payment

Calculation method

Rent needed

Personal Name

2.79% 2- year fixed

£803

Projected payment at 5.5% (£1581) x 145% margin

£2292

Personal Name

3.79% 5-year fixed

£1090

£1090 x 145%

£1580

Limited Company

3.79% 5-year fixed

£1090

£1090 x 125%

£1362

OCTOBER 2020

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Call: 0370 707 1894 Email: enquiries@zephyrhomeloans.co.uk Visit: zephyrhomeloans.co.uk This information is correct as at 29th September 2021. We reserve the right to withdraw and amend our products at any time without notice. All applications are subject to our full Underwriting Criteria, details of which can be found on our website.

Zephyr Homeloans is a trading name of Topaz Finance Limited. Registered in England & Wales. Company No 05946900. Registered address The Pavilions, Bridgwater Road, Bristol BS13 8AE. Topaz Finance Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference No 461671). Most buy-to-let mortgages are not regulated by the Financial Conduct Authority.