The Autumn Issue — Consumer vs Professional BTL

Are mainstream lenders making a play into specialist BTL?

Editor-in-chief

Beth Fisher

Deputy editor

Andreea Dulgheru

Creative direction

Beth Fisher

Andreea Dulgheru

Sub editor

Christy Lawrance

Contributors

Matt Cottle

Beth Ure

Photography

Alexander Chai

Sales and marketing

Beth Fisher

beth@medianett.co.uk

Special thanks

Paul Hunt, Square1 Media

Steve Cox, Fleet Mortgages

Sam Norris, Grand Union Finance

Matt Cottle

Printing

The Magazine Printing Company

Design and image editing

Jana Rade, impact studios

BTL Insider Magazine is published by Medianett Publishing Ltd

Managing director

Beth Fisher beth@medianett.co.uk

0203 818 0160

Follow us: Twitter @BTL_Insider | Instagram @BTLInsider

For a while now, we’ve been hearing many industry experts predict that the PRS sector will see a change in the property investor profile, as a result of numerous legal and tax regulations pushing dinner party landlords to exit in favour of more professional landlords. It seems these predictions are now becoming reality, as a recent Paragon Bank study revealed 49% of intermediaries expect to place a higher volume of BTL mortgages written to portfolio landlords operating through limited companies over the next 12 months. Not only that, but recent figures from Hamptons show a surge in landlords investing in property through a limited company.

With such a significant shift expected in the PRS—and already in progress, according to experts—we decided to dedicate this issue to the two sides of the same coin: the consumer and professional BTL markets. For the regulated area of BTL, Central Trust and Mercantile Trust’s director of commercial operations talks about the latest trends in the consumer BTL market and whether we will see a boost in activity [p15], and property investor Matt Cottle offers his best tips for accidental landlords to succeed in a tricky sector [p46].

On the professional side of things, we take a look at whether the scores of landlords retiring will indeed make a dent in the number of rental properties available, or if younger portfolio landlords will carry on this legacy [p38]. Plus, several experts weigh in on the skills and knowledge property investors need to be a landlord, and whether a qualification should be on the table to boost the quality of rentals [p6].

Considering the identity of landlords will likely change, we investigate whether mainstream lenders will shift their focus on the specialist BTL market. With the help of several industry experts, we uncover all the positive and negative ramifications that this move might have on existing specialist lenders in the market [p26]. While many things are still up in the air, one thing’s for certain: change is on the horizon for those in BTL.

Mindmap

Do you have what it takes?

Interview

Why consumer BTL is here to stay

Insight

High hopes for the next generation of landlords

Cover story

A new threat to specialist BTL lenders

A matter of time Column

The expert way to being an accidental landlord

I do foresee that longer-term lenders will adapt and enter new markets. Competition is important for growth and, with their financial stability and ability to disrupt with competitive rates on complex properties and circumstances, they could become a force to contend with” p26

The credentials required for a successful landlord

Industry experts weigh in on the key elements landlords should know about running and financing their business, and whether a qualification is needed for better property management

Words by Andreea Dulgheru

Kundan Bhaduri, executive director at The Kushman Group

By introducing or enforcing more paperwork and a mandatory qualification for landlords, we are only going to drive more investors away from the market than are already leaving. This will only mean one thing: greater monopoly and a likely collusion among the bigger, corporate players—who can then effectively set the rents for the market—and fewer options and choices for tenants. This will be only to the detriment of renters. While ongoing professional development and training are critical for landlords, making these mandatory would be counterproductive. The National Residential Landlords Association (NRLA) already offers a range of excellent courses and programmes for new landlords. However, there must be a greater emphasis on property managers to be fully qualified so that small or amateur landlords can delegate their property management tasks to a professional. That will drive up standards in the market.

Chris Daly, managing director for specialist mortgages at Hampshire Trust Bank

A qualification would certainly help drive professionalism in the long term. However, I worry that implementing such a requirement now—with all the issues with regard to delivery, costs and enforcement to ensure landlords complete it—would squeeze the supply of homes in the PRS just when doing the opposite is absolutely crucial. We mustn’t forget that every potential and existing landlord already has access to excellent resources, made available from dedicated, government-run websites, as well as private sector participants such as estate agents, lenders, insurers, charities, and trade bodies. The government's proposed landlord portal and the Decent Homes Standard, alongside the introduction of a digital platform that will allow potential tenants to check this has been met for specific properties, will also help to improve standards in the PRS. Plus, lenders have their own vital part to play in supporting landlords who are already meeting high standards and challenging those who are not.

Helen Cawthra, head of intermediary relationships at Vida Homeloans

This is a complex issue because someone must first define what constitutes being a landlord. It sounds straightforward, but a landlord comes in many shapes and sizes, from a managing director of a limited company who owns a BTR complex, all the way to a retired person who happens to have one extra property by accident or a manager for social housing. The requirements of these roles are hugely different, so we would need to be clear on what we want to achieve with such a move and for whom it is meant. A framework might work for certain posts where landlords (or those working for them, such as managing agents) could access certain skills, but a one-size-fits-all approach may fall short of being useful for the wider market.

Lucy Waters, managing director at Aria Finance

It would be a big ask to expect landlords to sit mandatory qualifications, and it would take a lot of effort to generate the necessary support to make such a drastic change. Instead of creating additional barriers to entry, a better approach may be to focus on improving the quality of rental properties. Estate agents play a critical role as intermediaries between landlords and tenants and would be ideally placed to carry out more formal assessments to ensure reasonable conditions are met before a property is let. This is where some form of regulation and professional training for estate agents would likely have a bigger impact in encouraging greater professionalism and improving living conditions for renters.

Jeni Browne, sales director at Mortgages for Business

I think there is a disparity between what people believe being a landlord is like and the reality—which means knowing about the ongoing maintenance of a property, licensing, legal challenges, EPCs and many other issues—so a course for new entrants could be a great way of giving them the knowledge they need to run a successful letting business. I don’t think this would be appropriate for experienced landlords, and we need to be incredibly careful about forcing a new requirement on them when our seasoned landlords—most of whom are professional and empathetic—are already so disenfranchised with the large level of regulation and change they have experienced over the past few years.

HOW COULD A UK-WIDE MANDATORY QUALIFICATION FOR LANDLORDS HELP DRIVE PROFESSIONALISM?

Barry Luhmann, head of BTL at United Trust Bank

All private rental homes should be safe, secure, fit for purpose, energy efficient, and offer value for money. The emphasis should be on the quality of the property rather than the quality of the landlord. Plus, I’m not sure a qualification would force bad landlords to clean up their acts. I’d welcome a registration scheme if there was a specific goal to achieve but, when looking at the regulations already in place, I’m not sure what parts (or which landlords) we’re trying to gain further improvement from. On top of this, a scheme is unlikely to be free for landlords and, inevitably, it would incur yet another cost passed on to tenants. At a time when the imbalance in rental supply and demand and landlord financing costs mean rental pricing is rising extremely quickly, this doesn’t seem to be the right solution or the right timing.

WHOSE RESPONSIBILITY IT IS TO ENSURE LANDLORDS ARE SUFFICIENTLY PREPARED AND EDUCATED TO MANAGE BTL PROPERTIES?

Kundan Bhaduri, executive director at The Kushman Group

In fostering well-informed, responsible landlords, the onus eventually rests on a collective effort involving various stakeholders. While landlords themselves should take the initiative to educate and prepare themselves, governmental bodies must provide accessible information on rights and regulations in easy-to-understand language. In addition, landlord associations and other industry bodies play a pivotal role by offering training programmes and resources. Financial institutions and property management companies can also contribute to enhancing landlord knowledge by educating, enabling, and empowering their customers. If we take an amicable and joint approach, a knowledgeable and conscientious landlord community can thrive, benefiting property owners and tenants alike.

Chris Daly, managing director for specialist mortgages at Hampshire Trust Bank

Just as with any other walk of life, nobody is going to swoop in and shield you from your responsibility. Investing in a BTL property is a serious undertaking that will require continuous hard work, constant learning, and smart adaptation to factors beyond any one person’s control. Landlords must be prepared to shoulder this burden by themselves. As lenders, we try our very best to judge if a potential client has prepared themselves sufficiently, but the responsibility will always begin and end with the landlord.

Helen Cawthra, head of intermediary relationships at Vida Homeloans

Landlords must be responsible for their own conduct under the law. However, there are lots of people who are trying to help landlords stay up to date, and it is our responsibility to support them wherever we can. Unfortunately, no organisation can really take on the whole gamut of what may or may not need to be known, so it makes sense for everyone to help where they can. When assistance is requested or of a nature where knowledge is essential for the continuing practice of the landlord, then lenders and the media can signpost this for landlords to access. Landlords are under significant stress, especially those who hold property in their own name and are highly geared. They need good brokers and lenders to support them.

Lucy Waters, managing director at Aria Finance

First and foremost, landlords should take responsibility for educating themselves, but their job is not easy due to a lack of high-quality resources being readily available. Information is often hard to find and exists in different places and formats. A governmentbacked website could be a potential solution, providing a good first point of call for prospective landlords. It would also be nice to see a community-driven approach to solving this problem, somewhere landlords can go for high-quality advice from likeminded people.

Jeni Browne, sales director at Mortgages for Business

I believe that, ultimately, it’s the landlords responsibility. And, in the main, landlords recognise this and will ensure they understand legislation and other necessary rules. Should it become a regulated matter? I think there is a chance this might be on the horizon. While this will focus on important issues such as tenant safety, what it sadly won’t do is prepare a landlord for some of the other types of challenges they are likely to face, such as non-paying or antisocial tenants. A really good scheme would cover all aspects of letting a property, not just focus on the things a landlord needs to do to meet legal requirements.

Barry Luhmann, head of BTL at United Trust Bank

Being a landlord comes with a great deal of responsibility. People are going to be living in a property supplied by someone who is responsible for its safety and suitability as a home. I don’t think this is something landlords should look to pass on to someone else. It’s ultimately on them to ensure they’re up to the job. That being said, there are a number of organisations that can help novice landlords become great ones.

Kundan Bhaduri, executive director at The Kushman Group

Good landlords always educate themselves on the profound impact of things like inflation, base rates, swap rates, and mortgage stress tests etc. The effect of inflation on rental income and expenses coupled with changes in central bank base rates can significantly sway borrowing costs and mortgage affordability. It is therefore paramount for portfolio landlords in particular to understand the securitisation market so they can plan their refinancing strategy ahead of time. Knowledge and empowerment are key to safeguarding profitability in today's fluid mortgage market.

Chris Daly, managing director for specialist mortgages at Hampshire Trust Bank

Absolutely—any landlord who is serious about their investment should learn as much as they can about the sector using as wide a variety of sources as possible. Brokers are, again, a great place to start. For funding, swap rates come in, which are often incorrectly used as a direct proxy for funding costs for lenders—there are other, sometimes contradictory, forces at play, including the cost of deposits and bank overhead inflation to take into account. Other factors can have an impact on pricing and the security of funding. For example, some lenders rely on securitisations or private credit, which can be more volatile than traditional deposit-based funding. It is important to understand a provider’s funding model in order to assess its risk profile. Consider: in a banking crisis, which type of model is most likely to see funds dry up? I will also add that learning about these subjects will reap dividends in all areas of a person’s financial life, whether they are a landlord or not.

Helen Cawthra, head of intermediary relationships at Vida Homeloans

On one level, understanding all parts of the financing value chain will make for better understanding and perhaps wiser decisions but, ultimately, landlords in the PRS are in the business of providing homes for people. How these are funded may be of interest but, beyond the cost of the borrowing and terms, it is not always essential— it could even prove to be a distraction when so many other matters are pressing. What really counts is access to funding when it is needed and understanding that price, criteria and affordability are the key issues. Service is also very important, which is why we have invested so much in this area. At the end of the day, the mortgage broker is the expert and landlords can rely on them to ensure they are getting the very best advice.

Lucy Waters, managing director at Aria Finance

The BTL sector is fast moving and heavily impacted by a variety of economic, political, and social factors. Landlords don’t need to be experts on these issues or understand all the nuances of financial markets, but it’s important to have some awareness and to know where to go for more information when needed. Furthering your knowledge and education can only be a good thing and will make life as a landlord that little bit easier.

Jeni Browne, sales director at Mortgages for Business

I think it would be to a landlord’s advantage to understand the mortgage market. However, as this is something they cannot control, I think most would take the view they have far more pressing matters to educate themselves on—and that a good broker will always give them the best deal available at the time.

SHOULD LANDLORDS EDUCATE THEMSELVES ON HOW INFLATION, BASE RATES, AND THE SECURITISATION MARKET IMPACT BTL PRICING AND OPTIONALITY?

Barry Luhmann, head of BTL at United Trust Bank

I don’t think all landlords need to be BTL finance experts, but it’s important they have a basic understanding and awareness of pricing and options, particularly if they have a fairly high amount of leverage in their portfolio. Knowing your financing costs are going to be affordable if rates continue to increase is vital, in the same way any business owner should keep a close eye on their costs to remain profitable. For lower-leveraged landlords and those lucky enough to own their rental properties outright, it’s less of an issue, but it becomes important if they plan to raise new finance to make another acquisition or release capital for improvements. My advice would be to find a good, proactive mortgage intermediary who will keep you up to date without you having to do all the homework yourself. Having a basic knowledge of BTL pricing is useful, but it’s not a simple equation. A better use of a landlord’s time is to stay in regular contact with an intermediary who knows their stuff.

Back to Buyto-Let

Are we using September as an excuse to borrow some ‘Back to School’ messaging? Yes. Are we confident now is the time for brokers and their clients to get back into the Buy-to-Let market? Again, yes. Are we gutted we couldn’t get our ‘Back to SchooBTL’ header signed off? Absolutely, yes.

Mortgages made simple Search | LendInvest

WHY MORE LENDERS MAY VENTURE INTO CONSUMER BTL

With upcoming and proposed tax and regulation changes on the horizon, more landlords are opting for bigger portfolios and limited company investments. But where does this leave the consumer BTL market? Maeve Ward, director of commercial operations at Central Trust and Mercantile Trust, shines a spotlight on the state of this sector, and explains why it is more resilient than one might think

Words by Andreea Dulgheru

HAT LEVEL OF DEMAND HAVE YOU SEEN FOR CONSUMER BTL LOANS OVER THE PAST 12 MONTHS?

There has definitely been an uptick in the level of consumer BTL loans coming through to Central Trust, which is to be expected in the current climate, as those customers looking to capital raise are starting to look at all the options available to them in the market. Brokers are also exploring all the assets that a borrower may have and are seeking alternative solutions for their clients’ financial needs, as they are finding it harder to place business with the high street, as a result of tighter lender criteria and affordability challenges.

WHAT RECENT TRENDS HAVE YOU NOTICED IN THE CONSUMER BTL MARKET IN TERMS OF LENDING CRITERIA AND LOAN USES?

Customers are either looking at debt consolidation, home improvements, or a combination of both. This is perhaps due to people putting their moving plans on hold and choosing to extend to create extra space as, overall, it would be cheaper than moving. There are also other borrowers who may have managed to weather the storm through the pandemic that are now starting to feel financial pressure and have started to miss payments, which presents a challenge from a criteria perspective when looking to capital raise via traditional

methods. We have seen that the average LTV is circa 60% with an average loan size of £35,000.

WHAT ARE THE BIGGEST MISCONCEPTIONS AROUND CONSUMER BTL MORTGAGES?

While I believe there is certainly awareness of the consumer BTL offerings available in the market, there is still some education needed on what constitutes an accidental landlord. It is not uncommon for our unregulated business Mercantile Trust to receive deals on a BTL basis, when it should be a consumer BTL—if this happens, the case has to be referred back to the broker to research the market again to find the best consumer BTL offering for the customer.

WHAT ARE THE MOST COMMON REASONS WHY AN APPLICATION FOR A CONSUMER BTL MORTGAGE MIGHT FAIL, AND WHAT SHOULD BROKERS PAY PARTICULAR ATTENTION TO WHEN ARRANGING SUCH A DEAL?

As consumer BTL is regulated, it requires brokers to hold specific permissions to enable them to arrange and advise on these types of deals. As it is a regulated mortgage contract with an ESIS, binding offer, and reflection period, this will be new to those predominantly operating in the unregulated BTL market.

Finally, while affordability is assessed on rental, it is also subject to stress testing. There are some lenders that will allow top slicing using other earned income when there is a rental shortfall, but this is subject to a full income and expenditure assessment.

“I think we will see a steady increase in consumer BTL in the future, driven mainly by current market conditions”

WITH ALL THE CURRENT MARKET CHALLENGES, HOW DO YOU THINK THE CONSUMER BTL SECTOR WILL PERFORM MOVING FORWARD?

I think we will see a steady increase in consumer BTL in the future, driven mainly by current market conditions which have created a solutions-driven lending environment that is opening the specialist lending market to brokers who may not have previously had much experience of the sector.

More advisers are being proactive and seeking different ways to best serve their customers by finding alternative solutions, and we have started to see brokers reaching out to better understand these other areas of the market, whereas traditionally they would have focused on mortgages. This will not only help them to best serve their customers, but also protect their client bank and future earnings.

WHY IS CONSUMER BTL AN IMPORTANT PRODUCT TO HAVE AVAILABLE TO BORROWERS? DO YOU FEAR ITS EVENTUAL DISAPPEARANCE?

Consumer BTL is equally as important as any other product in a broker’s tool kit and is another way in which a borrower can achieve their aspirations by releasing equity from an asset that they own. It also offers accidental landlords greater financial protection because it is regulated by the FCA.

I do not see the consumer BTL market disappearing any time soon, if at all; the FCA identified the need to offer accidental landlords greater protection,

which is why the product was carved out as part of the mortgage credit directive in 2016.

HOW CAN THE GOVERNMENT, LENDERS, AND BROKERS SUPPORT THE CONSUMER BTL MARKET?

There is a definite need to improve education and awareness for both consumers and brokers about what is and isn’t consumer BTL, and how affordability is assessed. Lenders need to ensure they inform their brokers about their offering, who it is aimed at, and the benefits to those looking to capital raise. Brokers can then educate their clients—in situations where it is appropriate—on why it is the best solution for their needs.

Given the current economic climate, we may see more lenders enter the consumer BTL sector, which would not only create further awareness, but create more competition, which can only be a good thing for consumers.

HOW ARE THE NEW CONSUMER DUTY RULES APPLYING TO CONSUMER BTL, AND WHAT SHOULD BROKERS BE MINDFUL OF?

Consumer duty applies to all regulated activity, replacing TCF with a clearer standard of client protection by ensuring that firms put the needs of the borrower first. Lenders and brokers need to make sure that the consumer BTL products being recommended offer fair value without excessively high fees, and that the terms match their target market by performing as expected, evident in the outcome that the customer experiences throughout the life of the loan.

WHAT ARE THE BIGGEST TRENDS YOU EXPECT TO SEE IN THE CONSUMER BTL SECTOR OVER THE NEXT YEAR?

I think the outlook for the market is positive and lenders will continue to educate and create awareness which will help to drive growth in the sector. We may see more lenders enter the market and bring increased competition, which will help to facilitate change and may lead to a broadening of criteria and product offerings—thus providing more solutions to customers.

Currently, finding solutions for borrowers is paramount, and consumer BTL is just another way borrowers may be able to achieve an outcome that otherwise wouldn’t be available through traditional avenues.

This offers a great opportunity for more mortgage advisers to tap into the specialist market, particularly as lending criteria continues to tighten, with less options available for their clients on the high street. We would actively encourage any brokers wanting to learn more to reach out to specialist master brokers or packagers that are highly experienced and have strong lender relationships, as this will add value to their existing proposition and open up doors to alternative solutions that otherwise might not present themselves.

“There is still some education needed on what constitutes an accidental landlord”

The

big quit

PRS shrinks as landlords retire

With nearly three-out-of-four landlord sales last year attributable to retirement, who will step into their shoes—and what will happen to the homes?

Words by Beth Ure

ACCORDING TO HAMPTONS, RETIREES DROVE LANDLORD SALES IN 2022, ACCOUNTING FOR 73% OF DEALS FOR THE YEAR, AND THAT PERCENTAGE IS EXPECTED TO RISE IN 2023.

Experts agree that several influences, from changes to taxation laws to rising interest rates, are pushing landlords to jump ship, with many of those who purchased property with BTL mortgages in the 1990s or early 2000s now reaching retirement age.

“A lot of reasons are all coming together, and older landlords don’t want to do it anymore,” explains Sam Norris, founder and managing director of Grand Union Finance. “They’ve been through the credit crunch, Brexit, the pandemic, and now there’s a potential recession, so they’re now saying, ‘This is one too many for me’. When you’re younger, you can stomach things like this a bit more because you know you’re in it for the long game,” he adds.

Alex King, executive director at Lendco, agrees that landlords are being squeezed from all sides. “It’s a whole combination of factors,” he says. “They’ve owned the property or properties for a long time and probably had a very sustained and long period of capital appreciation, so there’s equity tied up in the assets they’re holding. Plus, there’s the steadily increasing cost of borrowing that we’ve seen over the past 10-12 months. Add all that together and there’s an incentive for the less professional landlords with smaller portfolios to think twice about whether they still want to be a market participant.”

Based on data from UK Finance, Alex explains: “The BTL market year-to-date in 2023 is at least half the size that it was this time last year. At the end of Q1, it was anticipated to be around 30% [down] year-on-year.”

However, a spike in retirement was always likely to happen around this time regardless of the recent changes in taxation laws, according to senior analyst at Hamptons David Fell. “The big boom in BTL came in the early to mid-1990s when BTL mortgages were launched. A lot of the people who bought in then perhaps weren’t particularly young at that point,” says David. “Now, we’re 20–25 years on and those people are 60-70 years old and they’re looking to get out and crystallise their return.”

As a result, David predicts the number of landlords retiring will remain high as cheaper, fixed-term mortgages continue to expire in the coming years, acting as a catalyst for more landlords to sell.

He also notes that many retiring landlords are selling properties that require renovation before they can be let out again. “The level of work required to re-let the property is often one of the reasons landlords choose to sell rather than re-let, along with the expiry of a fixed-rate mortgage or the age of the landlord. Often, it’s a combination of all three,” he says.

Shift to owner-occupation

As the number of retiring landlords is set to continue to rise this year, the quantity of rental stock is expected to decrease. “At the moment, we’d estimate that around 40% of the homes sold by retiring landlords end up back on the private rental market,” David comments. “Around onequarter are bought by a first-time buyer, and the rest are bought by another owner-occupier.”

While the number of first-time buyers dropped in 2022 compared to 2021, according to data from UK Finance and Halifax, the percentage of firsttime buyers of all home purchase loans increased to 52%. This shift can be mostly attributed to government policy, which has focused more on helping people become homeowners. “That’s great for first-time buyers,” David explains. “But, if you’re a tenant and you can't or don’t want to buy, obviously that diminishes the number of homes available to you and ultimately pushes up rent.”

In recent years, Sam has seen an increase in the number of existing investor clients at Grand Union Finance buying whole portfolios from other investors. The purchase is often agreed at a discount as the retiree is looking to sell in bulk. “I have one client buying five properties from one landlord all on the same mortgage.”

While not all the properties being sold by retirees are ending up in the hands of other landlords, the ones that do are usually provided with a much-needed renovation before they go back on the market. “A lot of these properties have been owned for a long time by landlords who haven’t really seen it as a profession; they’ve just seen it as a side project or a pension pot,” Sam clarifies. “They’ve not necessarily maintained the properties to the standards we would’ve wanted, so now professional landlords are bringing those properties up to a better standard. Some of them are even making them a bit more energy efficient, so there are some positives.”

Who’s taking over?

The surge of older landlords retiring appears to be creating an opening in the market for a new generation of landlords. But there is some disagreement over what this next generation will look like.

“We haven’t seen many younger landlords coming in,” David says. “We’ve generally seen a consolidation of properties and, typically, it’s larger landlords buying up the properties sold by smaller ones. Some older landlords are buying and are still growing and, while there have been some younger landlords, we’re probably only talking around 30%.”

This hasn’t been the case for Sam: “I’d say [the new landlords coming in] skew younger. The average age of my clients is people in their 30s, and I’ve also got many in their 20s. The average age of landlords is reducing, because people are getting better educated earlier and they’re getting into the industry earlier,” he highlights.

Research from Paragon Bank supports this, with the percentage of borrowers aged 18–34 in April 2023 up more than eight percentage points since January 2014, rising from 13.8% to 22.2%. Meanwhile, the percentage of borrowers aged 45–59 dropped by almost 12 percentage points over that period, from 47.5% to 35.8%. While some of those borrowers would have been owneroccupiers, increasing homeownership among the younger age group could translate into more young landlords entering the market.

Alex explains that borrowing costs and prices would need to fall to lure younger landlords. “But of course, that would also bring back first-time buyers and home-movers into the market, so there’d be a lot more competition,” he adds.

Overseas landlords are also unlikely to take the place of retiring landlords in the same numbers, particularly as they overwhelmingly buy newbuilds rather than resale properties, according to research from Hamptons.

“There have certainly been fewer overseas landlords in recent years,” David states. “A lot of them bought in around 2016 before the changes in taxation—and that tends to be a very hands-off investment. They’d buy a new-build and enjoy a couple of years of growth while it was still being built, and then it would be managed at arm’s length. We’ve seen that drop quite significantly since the 3% stamp duty surcharge was introduced in 2016.”

Supply down, demand up, rents up

While some people are buying up stock brought on the market by retirees to become private landlords or further build their portfolio, rental homes are not being bought in the numbers needed to decrease rents.

Between 2009 and 2019, there was very little rental growth. It averaged 1–2% per year, which was lower than inflation for most years, according to data from Hamptons. David explains that the low growth was driven mainly by new landlords buying into the sector in big numbers and keeping rents down. However, rents are now up 25% compared to pre-pandemic levels.

Rising rents normally attract new landlords to the sector but, as the increased mortgage rates mean this can result in little overall profit, in this cycle fewer landlords are entering the scene. “In a lot of cases, the mortgage interest is potentially doubling or tripling,” says David. “So, even if rents are up 20–25% on a couple of years ago, the size of the increase in their mortgage bill actually often outstrips that.”

This also affects landlords selling properties, as David claims they will achieve less on their sale than they would have six months ago, due to market conditions. However, he says any change will be minor relative to the level of capital growth over the 11 years the average landlord has owned a property.

As first-time buyers and home-movers are scooping up some of the properties retiring landlords are selling, fewer homes will be available to rent, which could affect the entire property market.

“With more landlords looking to sell or already selling, some of this stock will of course find its way into the private residential sector, not the private rental sector. The knock-on effect therefore is fewer available properties,” Sam says. “Rental demand has gone up, with high mortgage

rates stopping potential first-time buyers getting on the ladder. Meanwhile, there are few rental properties available. So, when demand is high and growing, and supply is low and dropping, the obvious outcome is a sharp increase in rents.”

“It’s a bit of a vicious circle and I feel sorry for tenants,” adds Alex. “There was already a shortage of stock within the rental market before we entered this period of landlords thinking twice about whether they want to participate. Reduced supply is just driving rents up further, and that’s before the cost of borrowing feeds its way through.”

“It's not a good situation for those who want to buy or rent this year,” Sam notes. “Potential buyers can’t buy because mortgages are too expensive, house prices haven’t come down as low as some people would’ve wanted them to or predicted this year, and rents have gone through the roof—so everything’s just become more expensive. It’s having a lot of knock-on effects.”

The burgeoning BTR sector has started to fill some of the gaps, with more corporate landlords ready to deliver large blocks of new rental homes. The National Planning Policy Framework states that developers of these homes should, as standard, offer tenancy agreements of three years or longer. These are sometimes known as familyfriendly tenancies as they are intended to provide longer-term security and stability for those who wish to settle down. “Tenants end up paying a bit of a premium, though, because it’s quite a different type of property,” David details.

“We haven’t seen many younger landlords coming in. We’ve generally seen a consolidation of properties and, typically, it’s larger landlords buying up the properties sold by smaller landlords”

Move to long-term investment

Direct government intervention to keep properties available to rent is unlikely, as the majority of government policy in recent years has been focused on helping first-time buyers get onto the property ladder.

“Overall, the composition of landlords that remain will be mostly established landlords with big portfolios who see it as a viable, long-term investment,” Alex says.

The changing face of landlords could also mean the public perception of the

profession could evolve—which is something Sam would like to see.

“The general public is broadly uneducated about what landlords do,” he expresses. “They create homes for people because they renovate properties for those who don’t have the time or the resources, and create a much higher quality of homes for people. They’re needed by our housing system.”

“A lot of these properties have been owned for a long time by landlords who haven’t really seen it as a profession; they’ve just seen it as a side project or a pension pot. They’ve not necessarily maintained the properties to the standards we would’ve wanted, so now professional landlords are bringing those properties up to a better standard”

Are high-street lenders eyeing

THE SPECIALIST BTL MARKET?

Traditionally, mainstream lenders have kept their distance from complex BTL deals. However, as some major players have announced their intentions to launch specialist products in this space—and others are rumoured to do the same in the near future—our sector might face a seismic shock

Words by Andreea Dulgheru

In July, Metro Bank unveiled plans to introduce BTL loans for shared ownership and limited company landlords. This followed Barclays Bank finalising its acquisition of specialist BTL lender Kensington Mortgages. With two high-street banks showing their intentions to enter the specialist space, and some building societies—such as Beverley Building Society and Cambridge Building Society—launching new specialist BTL products, this area is slowly becoming more appealing to conventional lending institutions.

This begs the question of whether more mainstream finance providers would widen their focus to cater to this niche market. After all, changing BTL purchasing trends, the predicted increase in professional landlords with complex property portfolios, and ongoing market volatility could be the encouragement toward doing so.

Complex buildings and borrowers

To see whether mainstream banks could become specialist BTL lenders, one must identify what specialist BTL finance is—a task that is trickier than one might think, as there is no allencompassing definition for this. Nevertheless, there are several characteristics that experts believe make a specialist BTL proposition.

In terms of the products that come under the specialist BTL umbrella, they agree that loans for more complex property types, such as holiday lets, semi-commercial, HMOs and MUFBs, are part of this category. As for borrower type, products for clients with complex circumstances or ownership structures—such as applicants with adverse credit, expats, portfolio landlords, or people looking to acquire rental properties under a limited company—can all be classified as specialist BTL. “I'd say specialist is anything that doesn't tick a standard box,” states Sophie Mitchell-Charman, commercial director at LendInvest.

Matters get a bit more complicated when it comes to limited company and portfolio landlord BTL offerings. As the number of investors with more than four mortgaged rental properties in their portfolio—the PRA’s definition of a portfolio landlord—is expected to grow due to ‘dinner party’ landlords looking to retire or exit the market, and more people are holding rental properties in a limited company, it’s safe to say that these two types of borrowers have become and will likely continue to be prevalent. This brings into question whether these products should still be considered as specialist BTL.

While some agree that limited company and portfolio BTL landlords have become more mainstream, loans made to them should still be classed as specialist because of their complexity. “I would say that anybody who's got more than four properties does find themselves in that specialist space because they're juggling different things. They've got fingers in different pies and income coming in from different places. When somebody has got multiple assets, it brings more complexity, so it needs more understanding,” explains Sophie. “Limited company is

becoming more of a norm, but I would say that this aspect is not the specialist part—it's the stuff that comes alongside this. It can be quite complex with the structures, way people do their tax, having some people onshore and offshore, and having lots of parties earning different amounts of the business. If you've got a limited company, how complex is the structure behind that? Who fundamentally owns that asset? Is it two people who own a company? It could be 14 layers with other companies, trusts, and offshore assets involved in that.”

“Where you’ve got smaller building societies that offer an element of the specialist market, they’re still underwriting the loan based on standardised lending policy. Although they offer these products, we would find the target market to be narrow”

What is a specialist?

It’s safe to say that specialist BTL comes in many different forms, some more intricate than others. With this in mind, could any finance company that offers at least one of these products be classified as a specialist BTL lender? Sophie doesn’t think so, stating that a financier must be flexible and capable enough to cater for a variety of complex cases to be considered as such. “Mainstream lenders could offer to limited companies or portfolio landlords, but their risk appetite is probably quite low, so their stress testing might not stretch to where they

need it to be. They might have limitations around prices and LTVs, or the maximum number of properties or assets for one entity. If that product is the only thing that you do that isn’t standard high-street lending, that doesn’t make you a specialist BTL finance provider. However, if you offer it as one of the 18 different types of things that you do, then you're a specialist lender; you understand and have the appetite for it and can give that end customer the service and expertise they're looking for.”

Mike Davies, head of business development at YBS Commercial Mortgages, concurs that to be considered a specialist BTL provider, one must be able to meet landlords’ individual circumstances and requirements. “Different landlords with various

portfolio mixes, interests, and geographical focuses have different needs. Lenders need to be able to respond to those and not just come out with a one-size-fits-all product for the specialist market,” he elaborates. However, he does believe that you don’t necessarily have to offer the whole range of complex BTL products. “We see a lot of the smaller regional building societies have holiday let offerings, for example—that is a niche play for them.”

Manoj Chitroda, commercial director at FinSpace Group, notes that while some building societies do offer specialist BTL options, the core of the activity relates to vanilla BTL products—therefore, their underwriting approach is predominantly reflecting this and would not be deemed suitable for individual needs and characteristics of more complicated cases. “Where you've got smaller building societies that offer an element of the specialist market, they're still underwriting the loan based on standardised lending policy, as opposed to a commercial view. Although they offer these products, we would find the target market to be narrow,” he elaborates. Consequently, he believes only a handful of building societies can truly be classed as specialist BTL lenders.

“This is a whole new world for them, so they’ve got to get the right people in to do the job, and it will take quite a long time to do that unless they go out and snap up a firm that’s already in the market”

“I do expect the high-street lenders to dip their toe in the specialist BTL market; they cannot afford not to with rates and ICR calculations where they are at the moment”

Outside the occasional mainstream lenders dabbling in some niche areas of BTL, most of the experts I speak to have not yet seen many high-street banks and building societies in this space. According to Steve Cox, chief commercial officer at Fleet Mortgages, larger mainstream lenders have somewhat avoided this sector as loan processing and underwriting are done differently. He explains that mainstream providers tend to gravitate towards high-volume,

straightforward cases that can be processed through automation, whereas specialist BTL requires a degree of manual intervention to ensure the lender can satisfy a client’s specific requirements. “Specialist lending requires human touch to make a credit decision, as each case is different. Yes, technology makes processes more efficient but, at the end of the day, it seems very unlikely in the medium term we're going to have fully automated specialist underwriting,” he elaborates.

Sophie adds that it’s not the technology per se that makes it harder for mainstream banks and building societies to enter the specialist BTL market, but rather

the specific fintech solutions they use, which are not necessarily suitable for this type of lending.

“For a lot of these institutions, it looks like they've got great apps and service online but, when you dig deeper, it's not that well informed nor integrated with other systems. Therefore, they can't iterate and evolve their whole process and proposition that easily, whereas a lot of the smaller specialist lenders have built or bought that tech, or are using it as a service. By doing that, you can be really agile . . . while for mainstream lenders, this would be a 2–3 year project.”

Another contributing factor that has made it more difficult for mainstream providers to enter specialist BTL is the lack of skilled workers with the right type of expertise—something that Sophie highlights is essential to operate in this market. Graham Palmer, broker sales executive at Lendco, notes: “This is a whole new world for them, so they've got to get the right people in to do the job, and it will take quite a long time to do that unless they go out and snap up a firm that's already in the market.”

Graham adds that creating a processing infrastructure and a team for the sake of operating in the specialist BTL market will take a significant amount of time and investment from mainstream lenders. Therefore, it is no surprise that very few have decided to go down this route.

More human, less automatic

“One thing a lender must be in this market is agile, especially for the more complex cases. My concern would be the high street is too reliant on systems to make their lending decisions for them. Relying on the computer saying yes or no in this space would not be ideal”

A change in attitude?

With affordability stretched thin and portfolio and limited company landlords expected to dominate the market, it is likely there will be demand for specialist BTL finance for the foreseeable future. Could the potential for more volume tempt more high-street banks and building societies to enter this space?

Graham doesn’t seem to believe so, observing that if they were interested, they would have made their move a lot sooner. “BTL has been booming for quite a while so, if it was really worth doing, I think they would have been in the game a long time ago, or at least have opened their criteria a lot more over the past five years. Personally, I don't think they will enter the market and, if they do, it won't be any time soon. I imagine it would be quite a long process to get themselves into it,” he states. Manoj agrees, adding that creating the products, infrastructure, and team necessary to be successful in this sector will take a significant amount of time—particularly with the current volatile conditions.

Other experts think otherwise— in fact, Sophie tells me that several building societies are already building their specialist BTL propositions in the background and are looking to come into this space in the not too distant future. “I’m not surprised, [considering] the way the remortgage market is working and the changes in house prices and interest rates, plus a lot more people are renting. Why wouldn't they want to enter this space if they're comfortable with it?” Sophie elaborates.

Cox also believes we could see more mainstream lenders in this space, adding that it would be a way of diversifying and preserving their levels of business—filling in the gaps left by individual landlords exiting the market—as well as chasing the higher margins brought by specialist BTL loans.

Both Mike and Steve Nobbs, head of unregulated mortgage broking at The Loans Engine, also predict more mainstream players could enter the specialist BTL market. However, they think it will be a slow and steady movement. “I do expect the high-street lenders to dip their toe in the specialist BTL market; they cannot afford not to with rates and ICR calculations where they are at the moment. However, I feel it would be the more vanilla end of

the specialist BTL market, things like single-tier limited company transactions or smaller HMO properties. I don’t expect them to take on large multi-unit properties, complex company structures, or portfolio lending,” Nobbs says. Meanwhile, Mike claims that some mainstream lenders that decide to take this step may focus their efforts on niche areas, noting that borrowers no longer get all their products from the same institution.

Should more high-street banks and building societies choose to enter the specialist BTL market, there are two main ways they could do this: through building their own division or acquiring an existing specialist lender, the way Barclays did this year. While both options are on the table, Mike and Nicholas Mendes, mortgage technician manager at John Charcol, believe lenders might opt for the latter, as they will then get the people and loan book needed to succeed. “Building something ground up takes time. It can be done, but it's a matter of how quickly you want to get there. Also, if your legacy technology is focused on first-charge mainstream residential mortgages, it may be impossible to twist that to work for limited company BTLs, HM0s, MUFBs, or other specialist residential loans, so that may drive people to look to acquire rather than build,” adds Cox.

If this does happen, how much of an impact will their entry into this space have on the overall sector?

From a pricing point of view, Mike, Graham and Sophie believe this could result in price competition between the newer and older players, with mainstream banks and building societies possibly bringing in specialist BTL products at lower rates to grow business. However, Graham and Sophie claim this would affect only the simpler specialist BTL products, where these new players are more likely to place their attention. In response, existing

non-bank lenders and specialist banks would look to update their lending criteria to stay competitive.

“Price isn't necessarily the final determinant in where a landlord will borrow from, because of that need for specialist support. It isn't always the cheapest product that's the best—it's the one with the best options and features,” states Mike. “I do think you could see some price competition initially, but I think it would actually drive up overall quality in the market in terms of specialist provision. It might even push some of the smaller lenders to specialise even more and become defensive around being an HMO lender, for example.”

While mainstream providers may lower prices for some BTL products, most of the experts are confident specialist lenders will continue to

thrive in this market, thanks to their speed of delivery and experienced staff who can handle multifaceted cases. “The more complicated factors you have for any one deal, the greater the need is to use a specialist,” states Sophie.

In fact, Nobbs divulges that he’d be hesitant to submit any cases to a high-street lender that had recently entered the specialist BTL market, and would wait until they had been tried and tested. “One thing a lender must be in this market is agile, especially for the more complex cases. My concern would be the high street is too reliant on systems to make their lending decisions for them. Relying on the computer saying yes or no in this space would not be ideal.”

Manoj shares the same view, stating that should this happen, FinSpace would be inclined to present simple specialist BTL cases at first to assess performance. “When a new lender enters the market, we as brokers are very much open to transacting with them. However, we are unsure how they will react to the case and what the journey will be like. If a high-street bank, for example, offered specialist BTL products, we would submit the most vanilla type of case to see how it would underwrite it. We would be hesitant to give the bank a case with the same level of complexity we would to an established specialist lender. We'd be very much open to using new lenders, but we’d be quite cautious and careful just to protect ourselves and our clients,” he notes.

Lower prices, but more caution

“I suspect before any lender wants to make any really big decisions, they need inflation and interest rates to stabilise so they know that whatever funding they put behind those products can be long-term and sustainable”

Regulation and competition

As mainstream banks and building societies are regulated by the FCA and PRA, their potential entry into the specialist BTL market brings into question whether regulatory bodies would take a closer look at this market and implement further regulation.

Yet again, opinions are split. Graham doesn’t believe this would bring in more red tape, as mainstream players would likely focus on simpler cases rather than high-risk deals of which they have no experience. As a result, the likelihood of deals going wrong and a need for more regulation arising is fairly low. Meanwhile, Cox feels the specialist BTL market is regulated enough, as lenders are already stressing ICRs and assessing deals for portfolio landlords based on the PRA rules.

Meanwhile, Sophie and Mike think the specialist BTL market could see more regulation in the future—however, they expect this to happen naturally, rather than being triggered by mainstream lenders entering this sector. Nevertheless, they don’t think

increased regulation would have a significant impact on existing specialist BTL lenders, as they say many are already operating to regulated standards. “If you follow the same processes, have the same systems and checks in place, are lending responsibly, and treating customers fairly, more regulation won’t fundamentally change what is already happening in most scenarios,” says Sophie.

It is also unclear how mainstream players entering the specialist BTL market will affect recruitment and staffing. Mike believes this could increase competition in terms of recruitment, as mainstream banks and building societies may need to build specialist teams, potentially taking candidates from specialist lenders. “There would be more competition for those resources, but I also think you'd see an increase in training to fill the gaps. It's great to recruit somebody who's got that track record and experience, but we're also taking a longer view. I think a lot of the other lenders will be doing the same thing. It would probably drive that need for training and support for existing staff we want to develop.”

“If a high-street bank, for example, offered specialist BTL products, we would submit the most vanilla type of case to see how it would underwrite it. We would be hesitant to give the bank a case with the same level of complexity we would to an established specialist lender”

Enter with caution

than go to a mainstream lender.

Overall, while the potential for mainstream banks and building societies to widen their horizons to the specialist BTL market is there, it is hard to predict on what scale we might see this shift—and when.

According to Sophie, there is potential to see some players move into this market soon. In her experience, various lenders have already started planning for this.

“I think that we’re going to see a few drop in at the back end of this year—particularly at the start of 2024, once we’ve got a bit of stability in the market. That said, I don’t think the high street will ever get into the truly complex end of the specialist space. I think they will always want to sit at the more vanilla end of the spectrum.”

Even if some mainstream lenders do decide to enter this arena, Sophie is confident that specialist finance providers will be able to hold their own, as borrowers with complex circumstances who already had a deal in place with a specialist BTL lender will likely remortgage with the same finance provider, rather

In the main, most experts I speak to believe highstreet banks and building societies will not enter the specialist BTL industry soon. “I suspect before any lender wants to make any really big decisions, they need inflation and interest rates to stabilise so they know that whatever funding they put behind those products can be long-term and sustainable,” shares Mike. Manoj agrees, adding that finance providers could look to lay the foundations now for their entry into this space, with execution in 18-24 months’ time.

While most believe a mainstream shift won’t happen any time soon, some believe the transition is inevitable. “While I don’t expect to see mainstream lenders enter the market immediately, I do foresee that longer-term lenders will adapt and enter new markets,” says Nicholas. “Competition is important for growth and, with their financial stability and ability to disrupt with competitive rates on complex properties and circumstances, they could become a force to contend with.”

24-hournotice period—whowins?

Brokers

by

Words by Andreea Dulgheru

frustrated

lenders pulling and changing products at the last minute have campaigned for a 24-hour notice period. However, this could end up bringing in problems of its own

umerous lenders have been shifting BTL products left, right and centre, and often with very little notice. The root of this problem points to the climbing Bank of England base rate, along with the fluctuations in swap rates. The combination of this has hit the industry hard, with some more affected than others.

“When the volatility started, specialist lenders pulled rates a lot quicker because they were getting impacted by any slight change, whereas the HSBCs of this world were pulling products a few weeks later because they’re less reliant on borrowing or lending other people’s money,” explains Sam Norris, managing director at Grand Union Finance, at the Specialist Finance Symposium 2023.

As a result, the notice period given by the scores of specialist BTL lenders that have repriced or removed BTL products in recent months have varied across the board, ranging from 48 hours— showcased by Coventry Building Society, which has been praised for its timely and consistent approach—to as little as two hours.

Naturally, these last-minute changes have not sat well with brokers, many of whom had to

work at speed to get deals done within very short timeframes. Frustrated by this lack of notice for product withdrawals or updates, three brokers—Riz Malik, founder and director at R3 Mortgages, Jamie Lennox, director at Dimora Mortgages, and Lewis Shaw, owner of Riverside Mortgages—took matters into their own hands and launched a campaign calling for lenders to sign a pledge to provide a minimum notice period of 24 hours to all affiliated brokers.

“In this day and age, there are zero excuses for lenders not being able to give a minimum 24 hours' notice when withdrawing products. In our eyes, saying it's all down to market volatility doesn't really wash,” argues Jamie. “These banks will have a huge team of experts in place to monitor these movements in advance before changes are actually made. None of them will be having a board meeting at 12pm and then be rolling out new rates that same evening. It is a logistical job that will take a number of days planning and updating their own software and websites and informing mortgage sourcing systems. All we are asking is if you know you plan to withdraw rates, let us know once that decision is made.”

“In this day and age, there are zero excuses for lenders not being able to give a minimum 24 hours’ notice when withdrawing products”

LATE-NIGHT, RASH DECISIONS

The campaign has since received significant support from fellow brokers. By offering a 24-hour notice period, intermediaries have sufficient opportunity to make recommendations and submit applications to secure the best rates for their clients, which benefits both them and the borrower, explains Anil Mistry, director at RNR Mortgage Solutions.

Matthew Lawrence, director at SX Mortgages, adds: “The average notice period has generally been the end of that working day, and this has seen a lot of brokers working till midnight to get deals submitted.” This could also lead to rash decisions by clients. Michelle Lawson, director at Lawson Financial, highlights that a short notice period could result in poorer quality applications coming through from brokers trying to fit in an application at the last minute.

On top of this, brokers maintain that this change will align more closely with the principles of the new consumer duty, which came into force on 31st July. “As brokers, we are responsible for giving our clients the best advice possible. They're making decisions on possibly the biggest purchase they will ever make, and for us to tell them they have two hours to make that decision or their rate will go up is putting them under unnecessary stress . . . A minimum

timeframe adopted by all lenders is something the market very much needs,” states Paul Neal, mortgages and equity release adviser at First Choice Financial Services.

IS 24 HOURS ENOUGH?

While the 24-hour pledge has been embraced by some brokers, not everyone is on board with the idea. Several are not in favour purely because they don’t think 24 hours is enough time to provide advice to a client and submit a formal loan application.

“The ideal timeframe would be 72 working hours; that should allow everyone more time to gather the documents, submit, and so forth; property isn’t always the customers’ only job/business,” states Matthew.

Marylen Edwards, head of lending for BTL at specialist lender MT Finance—which offers five days’ notice for any rate hike or drop—agrees that more time is needed: “The only thing that might require quicker changes and less notice is when there are consistent increases in rates over a number of days. This happened in September when we saw swap rates rise multiple times in one week. When things change that quickly, you can’t always give five days’ notice— although this scenario is rare.”

If a lender gives more notice, could this influence where brokers place their cases? While

“While having a decent notice period helps brokers and consumers, it can be damaging to lenders, as they can end up in a position where they are taking on high volumes of low profit or even loss-making loans, with these volumes then crippling their service”

“It would make our lives easier to have a minimum 24-hour notice period, but what if it led to overly cautious pricing from lenders? And the knock-on effects of that might disadvantage more customers than it helps. Rocks and hard places come to mind”

intermediary Lee Gathercole, co-founder of Rebus Financial Services, says he is more inclined to work with finance providers that give at least 2-3 days’ notice, most brokers will not limit themselves in this way. “There are too many variables to be taken into consideration,” explains Matthew. “I would always like to work with lenders that will have a conversation about a case, communicate well, and are more reasonable with timeframes, but this isn’t always the right product for the client. Ultimately, it comes back to the borrower’s requirements, what they are looking to achieve, and how they wish to do it.”

LOSS ON LOANS

Some brokers have been wary of the proposed 24-hour notice period, believing this could negatively impact lenders’ service levels due to the influx of last-minute applications from advisers looking to secure a deal before the deadline. “While having a decent notice period helps brokers and consumers, it can be damaging to lenders, as they can end up in a position where they are taking on high volumes of low profit or even loss-making loans, with these volumes then crippling their service,” explains Scott Taylor-Barr, financial adviser at Barnsdale Financial Management.

This is indeed the case for many lenders, particularly smaller ones. During the Specialist Finance Symposium 2023, Fleet Mortgages’ chief commercial officer Steve Cox commented that when a finance provider pulled a product, the high volume of business—often equivalent to several days’ or even weeks’ worth of deals—from brokers inevitably caused a backlog. “The longer the withdrawal window, the bigger the spike and the longer the lender will take to come back with another offering,” he said. “Some bigger lenders, like Coventry Building Society, receive good plaudits for their withdrawal window—but we are not in Coventry’s league, we just couldn’t take it in. It would destroy capacity and then we wouldn't have any products out there until far longer than brokers would probably want.”

The significant rise in BTL mortgage applications could also affect a lender’s profitability. According to AMI and IMLA’s recently published ‘Understanding Lender Funding, Product Availability and Pricing’ report, if a finance provider doesn’t pull products quickly once the funding runs out for fixed-rate deals at a particular price, it could risk selling the product at a loss, thus impacting its financial health.

On the back of this, some brokers are worried that a longer notice period for BTL

“We are constantly told what we have to do to support their clients and agendas but, if brokers ask for 24 hours’ notice, which is totally reasonable, will lenders take action or even care?”

product withdrawals or repricing could see businesses add more headroom into their pricing to accommodate this. “It would make our lives easier to have a minimum 24-hour notice period, but what if it led to overly cautious pricing from lenders? And the knock-on effects of that might disadvantage more customers than it helps. Rocks and hard places come to mind,” states Joe Stallard, director and adviser at House and Holiday Home Mortgages.

MAKE IT MANDATORY?

When it comes to the implementation of a 24-hour notice period, it’s safe to say that the interests of lenders and brokers are not aligned—albeit there are some exceptions to this rule. “The past three years has taught me that the lender/broker relationship is often a one-way street,” says Matthew Jackson, director at mortgage adviser Mint FS. “We are constantly told what we have to do to support their clients and agendas but, if brokers ask for 24 hours' notice— which is totally reasonable—will lenders take action or even care?”

This is why some experts in favour of a notice period are going one step further, suggesting that the FCA should consider mandating this to prioritise borrowers’ best interests. “This approach would ensure that brokers can access

the recommended product for their clients, subject to standard underwriting procedures, while fostering a greater sense of responsibility among lenders to minimise the chances of steering clients toward more expensive alternatives due to sudden product withdrawals,” elaborates Anil. Steve believes the key to solving this issue is finding a middle ground that would satisfy both brokers and lenders, but what would work in practice remains contested. Nonetheless, the brokers have put their cards on the table.

Developer and property investor Matt

What to do if you face unexpected landlordship

Words by Matt Cottle

Getting a new home is exciting— but expensive. A hefty deposit, stamp duty and fees for the mortgage arrangement, valuation, solicitors, agents, and removal firm all stack up. And then you must decorate, furnish, and pay the mortgage on it. The bills are never ending.

But what if your new dream home threatens to become a nightmare? What if you meet a new partner and you decide to move in together? Perhaps you have been offered a promotion in another part of the country that’s simply too good to turn down. Or, God forbid, economic circumstances mean staying at the property is no longer possible? Selling it would mean paying hefty redemption penalties and agents’ fees, not to mention kissing goodbye to all those costs incurred, rendering a disposal not worth the while.

If you find yourself in such circumstances, then becoming an accidental landlord might be the path for you. Don’t panic though—this is a road

Cottle offers his perspective on how to make the most out of being an accidental landlord, from taking in lodgers to providing shortterm lets

well travelled. If you don’t want to sell the property, or plan to return to it at a later point, there are several things you can do.

RENT A ROOM

If you are happy to risk an unknown person seeing you in your underpants in the morning or if you would like some companionship, taking in a lodger could be for you. For the right person, renting out a room or two could turn an impending economic disaster into a profitable enterprise. And the best part is that the government encourages you to do it by offering a tax-free allowance of £7,500. You can also rent out rooms in your home to short-term guests while you’re still living there. However, if you are a leaseholder, you will need permission from the freehold owner before taking in a lodger.

MOVE OUT, LET OUT

If you have no choice but to up sticks, you could simply put the house up for rent on the open market—if the lease allows subletting. There is a good chance that you will pay additional income tax on the rent you receive. However, if the rent after the deducted tax is greater than the cost of the mortgage and managing the property, your beloved abode will wash its face. The capital appreciation of the property is yours to keep and is being funded by someone else—welcome to the world of landlording.

Speak to a local letting agent to get an idea of the rental value of the property and get your accountant to do the maths. They will work out the tax you will have to pay and whether renting it out is worthwhile financially.

SHORT-TERM LETS: WHAT TO WATCH OUT FOR

Another option is to turn the property into a short-term let. You don’t need a lighthouse in Cornwall or a Farrow and Ball cottage in the Cotswolds to make hard

cash from holiday lets. People rent all sorts of homes in all kinds of locations for any number of reasons, and the money can be excellent.

If you do plan on going down the holiday let route, be mindful that you may need permission from your freeholder if you live in a flat. Some leases specifically forbid short-term lets. If you live in London, you will only be able to let the property for up to 90 days per year. Rules around holiday lets vary from place to place, so you should check these with your local council, but don’t let this put you off. Holiday letting is a lucrative business if you get it right.

Nonetheless, there is plenty of competition so make sure your property stands out and is priced correctly. Good coffee machines, a hot tub, a cinema setup, and twinkly garden lights will get the weekend warriors tapping their Apple Pay faster than you can say Airbnb.

It can be exhilarating to see just how profitable your gaff is. But be warned: you will need a lot more involvement— and expect your champagne flutes to get broken very quickly. Plus, you’ll be paying all the bills and handling the check-ins and check-outs, not to mention the property maintenance.

MORTGAGES

Whichever route you choose to take, you will need to check if your mortgage lender allows you to rent out your property, and get a ‘consent to let’ from them beforehand—this is only for a limited period though (usually up to 12 months).

You could opt to change to a BTL mortgage provider, but you may end up paying a higher interest rate, and there will be set-up fees from the solicitors and lender to think about, so best to consult with a mortgage broker first. You will need a BTL mortgage if your consent to let has expired and you plan on renting out your property long-term.

INSURANCE

You will also have to check that your insurance covers letting your home out to tenants, lodgers, or short-term guests. This can be as simple as speaking to your existing insurer and updating them about your plans.

If your insurance company does landlord insurance, they will offer addons such as rent guarantee and contents insurance. Whether you opt for these is down to preference and circumstances. For example, if you are not leaving any personal items or furniture at the property, then contents insurance is irrelevant.

With regard to holiday lets, many insurance policies cover damage by paying guests. If yours doesn’t, you will have to buy a policy that does. Companies such as Just Landlords and SimplyBiz offer this type of cover.

COMPANY LIMITATIONS

You could also transfer the property into a limited company structure, but beware. You would have to buy the property from yourself at market rate, which would trigger another stamp duty bill, as well as all the costs of applying for a new limited company mortgage. You may have to pay a redemption penalty on your old mortgage too, not to mention having to bridge the deposit until the transaction has completed. Frankly, it’s a huge faff and may not be financially worth it for your property. However, if you wish to continue buying investment property then yes, go ahead and set up a separate limited company for future purchases only.

GO FOR IT

In conclusion, what can initially seem a daunting prospect could turn out to be the best thing you ever did. I have done all of this and I’m now sitting in my dressing gown sipping a latte while typing this out at my leisure. Go for it!

What did we learn at the Specialist Finance Symposium 2023?

On 20th June, Medianett Publishing’s inaugural Specialist Finance Symposium brought together the titans of the industry to discuss the BTL mortgage market. The panel—which welcomed Steve Cox, CCO at Fleet Mortgages; Grant Hendry, director of sales at Foundation Home Loans; Caroline Mirakian, director of sales and marketing at UTB; and Sam Norris, managing director at Grand Union Finance— highlighted a lack of knowledge and the misconceptions around BTL loan pricing, conflicting views on changes to repossession law, and how EPC rules are not fit for all properties. We list our top five findings

Words by Andreea Dulgheru

Photography by Alexander Chai

1. Landlords don’t understand pricing

While the panellists believe a lot of landlords are now more professional, a major knowledge gap remains. Property investors often do not understand how BTL loan pricing works, according to Sam. “It’s amazing how many clients I speak to who have got multiple BTL properties yet can’t grasp what a rental stress test is.” He explains that with rising interest rates, lenders are increasing product fees in order to maintain lower rates and support loan affordability. “That’s one thing I'm educating my clients a lot about at the moment, because it's really key for them to understand why the fees are going up so much,” he adds.

Sam has even taken on the task of conducting impromptu lessons on the basics of BTL: “It surprises me how often I will talk about standard rental calculators and then have to explain it to them. I actually do a lot of Zoom calls with clients as a first consultation, and

have to get the whiteboard up and draw it out for them. I’m doing these calculations 17 times a day but they are not—you forget that sometimes. I think it is something that isn't spoken about enough.”

2. Five-year is cheaper than a two-year fix—but it’s not what landlords are looking for

On the topic of pricing, Steve explains that long-term fixed-rate mortgages are cheaper, and this dynamic has evolved over the past 18 months. “In essence, two-year money is more expensive than five-year. Our forecast is that you will continue to see more long-term fixed rates—not just in BTL, but in the market as a whole—because lenders can price them lower. It's not lenders trying to get you to lock customers in for any commercial reason, it’s just because long-term money is cheaper.”

“Until investors can see calm, securitised markets are hard to work with”

“It’s amazing how many clients I speak to who have got multiple BTL properties yet can’t grasp what a rental stress test is”

The other panellists agree; Sam is advising clients to opt for fiveyear fixed-term BTL mortgages as they are more economical—even if landlords would prefer to opt for shorter-term loans and refinance after two years. “With the dip in the market that's coming, you can only go through that refinancing process if you've got an upwardly trending market. But, in two years’ time, is the average property price going to be worth more than it is now? Probably not.” he explains. “I'm recommending five-year fixedrate loans to clients as it's going to be more cost-effective in the long run because they won’t have to refinance and have these additional costs again in two years’ time.”

3. Market volatility is affecting pricing and the securitisation market

When discussing swap rates, Steve comments that they are the main factor influencing pricing across the BTL market. He points out the several swap rate changes that happened in the span of a month before the panel discussion, which highlight the volatility and uncertainty prevalent in the sector.

“Ironically, even if we see the Bank of England base rate climb but then stabilise, that could drag swaps down. If this happens, it stabilises and possibly reduces fixed-rate pricing across the entire market,” he elaborates.

The instability of the UK finance market is affecting securitisations, which are one of the major avenues taken by non-bank BTL lenders to obtain more funding for loans.

“Securitised markets are always based on confidence; when price points are all over the place, margins and default rates become more difficult to predict,” says Steve.

“Therefore, the back-end investors who buy the securitisations tend to stand back. Until investors can see calm, securitised markets are hard to work with.”

4. Opinions are split over proposed private renting law

The Renters Reform Bill, which was recently introduced into parliament after a four-year wait, is also an area of debate, with the removal of section 21 in particular receiving a mixture of responses.

Grant believes the abolition of section 21 and the introduction of the new section 8 are positive changes, saying they will give tenants more security and landlords increased control. “I'm a fan of what they've done with section 8. They’re making it a lot more in favour of the landlord, but also offering complete transparency from the tenant’s point of view.” However, Caroline claims this move could further restrict landlords’ ability to repossess properties.

Steve brings up the proposed redress scheme, which would see the creation of a private rented sector ombudsman. While these measures are supposed to solve disputes between landlords and tenants in a cheaper, fairer, and more streamlined way, Steve isn’t confident the ombudsman will bring the desired result. “I wouldn't say the theory of the ombudsman makes it easier to deal with over the courts. I'm not entirely convinced it will play that way.”

Overall, the panellists believe the proposed law could bring more transparency and clarity in the PRS and will shape the new generation of landlords for the better. “We're going to get loads of new landlords entering the market over the next few years, and [this is] going to be very clear. I think it's a positive thing for the market,” concludes Sam.

5. EPC rating goals are unrealistic for older properties

The proposed minimum EPC C rating for rental properties has caused heated debate over whether landlords should upgrade their properties before the supposed deadline. While the experts believe the sector needs to support the green agenda, Steve accepts that these plans are not suitable for some buildings—such as Victorian houses—that are unable to reach the minimum EPC rating. He adds that it would be unrealistic to consider these properties as uninhabitable for tenants past the anticipated deadline. Because of this, he predicts exemptions will be put in place for properties that will struggle to hit the target.

Funding is also an issue when it comes to upgrading rental stock, adds Steve, as he feels there are no mechanics to secure a further advance loan to pay for the work.

“One of the problems in BTL is the assumption that landlords will want to do further advances to pay for this work, when there is no further advance facility—not because lenders don’t want to do it, but because the loans have been bundled, securitised, and sold on. There's an opportunity for advisers to start educating landlords on how their debt is structured and therefore what is or isn't possible.”

According to Grant, more guidance and support for landlords to navigate these proposed changes is needed. He highlights the misconceptions that persist around the upgrades required:

“There are some D-rated properties that are only 10 SAP points away of reaching C, so you don’t need double glazing, solar panels, or air source heat pumps—you [might] just need LED light bulbs and loft insulation. It’s not as extreme for some people.”

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