MFS: One size does not fit all

One size does not fit all

Exploring diversity within the UK landlord community

Paresh Raja Chief Executive Officer MFS

How many landlords are there in the UK? It is a question that appears to be simple – but in fact generates a multitude of answers.

HMRC data from July 2021 shows how many people derive income from property, according to their Self Assessment tax return. The number was 2.65 million which is a huge figure, encompassing some 31,380 landlords in Barnet, 27,060 in Birmingham, 1,070 in Clackmanshire, and a small collection of 190 on the Isles of Scilly. The publication of the data, and the noise it created served as a timely reminder of the breadth and variety of people that make up the UK’s landlord community.

As a lender, the creation and delivery of financial products must start with the fundamental understanding that each client is different; not just in their financial circumstances – how much they want to borrow, for what asset and for how long – but also in their motivations and attitudes.

Rental income versus repayments

In most instances, the viability of a buy-to-let loan will be determined by the relationship between the rental income a property generates and the cost of the loan. Known as the interest cover ratio (ICR) it is often enough to rule out many prospective borrowers. For instance, if the ICR is 145% and the monthly mortgage repayments are £1,000, the property must achieve a rental income of at least £1,450.

“A true relationship model is not just about new business, it’s about managing customers, brokers and staff through the cycle and being there when needed

On the surface, such principles are entirely sensible. Just as with a consumer mortgage, such checks and balances are designed to protect both the lender and the borrower. However, there are always exceptions to the rule. As such, a more flexible approach is required to assess the borrower’s longer-term plans and establish the right criteria on which to judge the viability of the deal.

Allowing for flexibility

Ultimately, we must appreciate that every landlord is different. Whilst some focus on receiving a high rental yield from their investment assets, others purchase properties they believe will reap the benefits of long-term financial growth. That’s why flexibility is crucial within the current market, not just with the different product options – but within the products itself.

How can lenders do this?

Deferred interest is one way. By reducing the interest paid during the term (e.g. take 1% off the rate), the rent goes further and provides a larger loan, or enables cashflow freedom during the loan to pursue other investments. Rolling-up interest is another option, i.e. adding the interest to the principal loan amount and paying it on redemption rather than monthly.

Alternatively, top slicing from wealth (not just from surplus income) can provide a lender with assurances about the ability of a landlord to pay unexpected maintenance costs or voids. Not all situations fit the same criteria often used for every applicant.

The valuation process is another important element in trying to see the bigger picture. Many valuers acting for a lender will take a snapshot of a property’s value or its expected rental income as it stands in the current market; however, when uncertainty abounds, their predictions will naturally be dampened, placing a squeeze on what they are willing to offer to a borrower. Flexibility can still make a case fit.

Finance, for everyone

Lenders need to be able to cater for seasoned investors, who live either in the UK or overseas and are looking to purchase property in England and Wales. However, they also need to be flexible enough to cater for first-time landlords, or buyers who are looking to invest in buy-to-let.

At MFS, we respect that each borrower will present different circumstances and therefore have different financial requirements. The onus, then, is on us – as the lender – to provide both products and methods for assessing applications that are as diverse as the UK’s landlord community itself. “

…flexibility is crucial within the current market, not just with the different product options – but within the products itself