The Summer Issue — Holiday and Specialist Lets

Issue 2

Summer 2023

Hol

s t e L iday

r b ub o m o Bo

ble?

+ Do we have the panacea for an ageing landlord market? p40

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SUMMER 2023

acknowledgements

Editor-in-chief Beth Fisher Creative direction Andreea Dulgheru Beth Fisher Deputy editor Andreea Dulgheru Contributors Ana Jagota Jeremy Bowden Sub editor Christy Lawrance Sales and marketing Beth Fisher beth@medianett.co.uk Megan Goncalves megan@medianett.co.uk Photography Alexander Chai Special thanks Jon Hall, OSB Group Ellie Craig, MT Finance Adrian Cormican, Hallcroft Finance Michael Clarke, Paragon Bank Jordan Lott, Paragon Bank Jodi Lund, JMW Solicitors Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Managing director Beth Fisher beth@medianett.co.uk BTL Insider is published by Medianett Publishing Ltd Office K5, 1 Burwood Place, Marylebone, London W2 2UT 0203 818 0160 Follow us: Twitter @BTL_Insider | Instagram @BTLInsider

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ith many UK residents planning their domestic vacation, and the high yields driving landlords to invest in these properties, it’s inevitable that holiday lets will stick around as a popular topic of discussion in our sector—even more so after Michael Gove launched a consultation this April to introduce a planning permission requirement for converting properties into holiday lets in a bid to limit the impact these are having on the wider market.

This, on top of Wales’ new holiday let regulation that came into force in April—which changed the criteria for a holiday let property to qualify for business rates—it seems fitting to dedicate our cover story to this evolving space. Using the help of seven experts in the BTL industry, we took an indepth look at the current state of this market and whether the changes on the horizon will be the ones to burst the holiday let bubble [p26]. The Summer Issue also delves into the topic of HMOs—yet another popular investment choice for landlords—and what the biggest misconceptions are about financing them [p10].

Of course, it wouldn’t be a specialist BTL issue without an in-depth analysis of BTR, a market that has seen significant growth in the UK over the past few years. As the rental demand ramps up due to the lack of available homes, our analysis aims to answer one burning question: can BTR help solve the current rental crisis? [p18] With some hard-hitting, insightful features and exclusive interviews with industry leaders—including Paragon Bank’s new commercial director for mortgages Louisa Sedgwick [p40], MT Finance’s head of lending for BTL Marylen Edwards [p6], and Hallcroft Finance’s new private finance division director Andrew Hardcastle [p46]—this issue is sure to bring you the best informed content you need, whether that’s at home or on a sunny beach. .

Andreea Dulgheru Deputy editor

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SUMMER 2023

contents

6 News

MT Finance takes on the wider market

Mindmap

What’s the deal with HMOs?

Insight

The growing market that could threaten traditional landlords

Cover story

Is the holiday let bubble set to burst?

Interview

Louisa Sedgwick / Andrew Hardcastle

Column

The devil is in the legal details

Spotlight

A glimpse into the party of the year

52 4

10 18

26

40

50

Regulation will sort the wheat from the chaff, and I think the people who see holiday lets as a quick win and a get-richquick scheme, will soon realise it’s nothing like that” p26 5

SUMMER 2023

news Words by Andreea Dulgheru

MT Finance brings its ‘bridging DNA’ to BTL market B MT Finance has rolled out its BTL proposition following a trial of several months. The firm’s head of lending for BTL, Marylen Edwards, talks about what drove the bridging lender to enter this space

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ack in July 2022, MT Finance made waves with its entry into the BTL market after securing a forward flow investment from JP Morgan, and recruiting Marylen to develop and implement the proposition and underwriting practices.

At first glance, the decision to enter a saturated market seems counterintuitive, but Marylen explains it is a natural progression for MT Finance. “We wanted to offer longer-term funding and potential exit strategies for our bridging clients,” she shares, adding that this decision was based also on the demand for BTL finance from its broker partners. “While there are a lot of BTL lenders, I think there’s always room for one more, and there was a gap available to mirror MT Finance’s bridging DNA in this market.”

The company has a mindset to offer a “service with a difference”, and the BTL team carried out extensive research to mould the proposition and soft launched the range last summer to a number of brokers with whom MT Finance have long-standing relationships. “We did really

well during the soft launch; we had a lot of business in the first six weeks and the feedback was really good. As the word started to spread, more brokers wanted to test it out, so we added a few more towards the end of August,” Marylen elaborates.

However, the mini-Budget threw a spanner in the works when it came to the full launch, so MT Finance chose to extend the trial period for a few months— officially opening it to the wider market in late March. “From the end of October last year until January 2023, the BTL sector almost stood still, as people took a little step back to see what was going to happen.

But, since interest and swap rates started stabilising somewhat at the beginning of this year, we’ve seen activity grow week on week, which is why we decided to open the BTL range to the whole of market.”

The offering provides several options for standard residential, semicommercial and HMOs/MUFBs, with applications accepted from individuals, companies, first-time buyers and

landlords, and those with adverse credit.

The standard residential products offer loans of between £25,001 and £2m at up to 80% LTV for units from 28 sqm, including holiday lets. The range comprises two- and five-year fixed-rate options, available for lending against houses, leasehold flats, maisonettes and new build dwellings.

For semi-commercial properties, there are two five-year fixed-rate products with a 2% and 5% fee respectively, both available at up to 75% LTV. Meanwhile, the lender’s HMO and MUFB product ranges provide loans of up to £1.5m (subject to LTV limits), with multiple options for small HMOs (up to six bedrooms), large HMOs (6-10 bedrooms), small MUFBs (up to four units) and large MUFBs (4-10 units). The small HMO and MUFB offerings include two- and five-year fixes, the majority of which are available at maximum 75% LTV. Meanwhile, the large property types can obtain only five-year fixes at up to 75% LTV—the large HMO range also includes some 65% LTV options.

Staycations seem to be as popular as ever with no sign of abating, despite our ability to now travel abroad”

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SUMMER 2023

news Service delivery is carried forward from the bridging side, including the ability to look at things quickly, not ask for unnecessary information, complete deals as soon as we can and keep brokers informed”

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Standing out and stress tests According to Marylen, the BTL proposition has several USPs, chief of which is a personal, streamlined service, based on her 10 years of experience as a broker. “Service delivery is something we’ve carried forward from the bridging side, including the ability to look at things quickly, not ask for unnecessary information, complete deals as soon as we can, and keep brokers informed so they know where they stand.”

In terms of lending criteria, Marylen says the lender’s stress testing on fiveyear fixes stands out in the sector, as the ICR is set at 125% for all tax brackets.

“We will also look at 28 sqm, while the market consensus tends to be 30 sqm as the minimum size for an individual BTL unit,” she adds. On top of this, MT Finance will consider loans for specialist properties, including holiday and shortterm lets, HMOs and MUFBs, some serviced apartments and first-time landlords, as well as complex deals.

“Serviced apartments are an anomaly for lenders, purely because most were purpose built for this use and so could never be used as long-term lets—we won’t lend on these. However, many landlords have taken regular properties that don’t have this caveat, so they can run and manage them as short-term lets but, in the event of a change in market demand, they could let them on a standard BTL. We lend for these types of properties based on what they would achieve as a standard AST.” Following the launch, Marylen says the company has received positive feedback from intermediaries, brought more brokers on board, and seen an increase in BTL enquiries. “It’s still early days... plus, the changes in swap and interest rates at the beginning of April meant we had to increase our pricing that week,

so we’ve had a lot more applications [before these changes],” she explains.

The rise in holiday lets Given that staycations have been popular of late, I was curious to find out whether the business is expecting to see continuing requests for holiday let loans. Marylen anticipates an even demand for all types of BTL cases, noting that landlords generally look for holiday let opportunities in the spring and autumn. “Landlords don’t look at short-term lets during the seasons, because one would have to buy them at a premium during the summer. Plus they’d be losing that season—buying ahead gives them time to market them through a management company so they’ll have bookings for the next holiday period. It’s towards September/October that you’ll maybe see holiday lets come up for sale, or people buying places they know they can convert into holiday lets as they’d have seen the demand for these themselves,” she elaborates.

While holiday rentals in cities and coastal towns remain popular, Marylen highlights that demand has spread throughout the country, partly because of property use restrictions in some holiday let hotspots. “A lot of specialist lenders that provide finance for holiday lets lend on what a standard AST would achieve.

For properties used purely as holiday lets for the entire year [as per a landlord’s choice], or in areas where holiday lets have to be used as such, rather than seasonal—like Cornwall—then you’re looking at a more commercial approach; it’s usually commercial lenders or building societies that will look at these and treat them as a commercial business, rather than a specialist BTL. Using Cornwall as an example again, a lot of the old cottages are made of mundic concrete, which a lot of

lenders won’t touch,” she explains, adding that some cities have fewer restrictions.

“Bournemouth and similar towns and cities are a landlord’s dream as you can rent a property to students from September until June, then rent it as a holiday let for three months before students come back. It’s the best of both worlds.”

MT Finance finds landlords look for properties in places they are based in or know well, as well as where they see demand. “It comes down to how comfortable they are with [the area], and also whether they can use the property as a regular BTL and/or an Airbnb, for example, throughout the year—it’s all about landlords being more savvy as to what works.”

Marylen expects holiday lets to remain popular as they can offer an attractive investment opportunity and a reliable income. “Staycations seem to be as popular as ever with no sign of abating, despite our ability to now travel abroad.

In terms of trends, there still seems to be a focus on city breaks, the coast, and areas of outstanding natural beauty—and I don’t see that changing any time soon.

However, landlords do need to do their research on the area and look into any usage restrictions that may be in place.”

For now, the company is focused on establishing itself within the BTL sector.

“It’s baby steps. We’ve still got this proposition to get off the ground and become massively successful before we start looking at anything else. In 2023 and going into 2024, we will lay the foundation, grow the business, and nurture and maintain relationships. However, there are a couple of new things that are being talked about—so watch this space.”

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SUMMER 2023

mindmap

What’s in store for HMOs?

For a while, HMOs—and their higher yields—have been landlords’ best friend. But with tax and regulation changes on the horizon, could these cast a dark cloud over this sector? Five industry experts share their views Words by Andreea Dulgheru

SUMMER 2023

mindmap

Tanya Elmaz, director of intermediary sales for commercial finance at Together The NRLA has been campaigning for a long time for the government to address issues created by the Valuation Office Agency (VOA) so we are incredibly pleased that it is proposing to charge a single council tax for HMOs. Adopting a ‘room-by-room’ approach can only lead to increasing costs for landlords, and therefore increased rents for tenants. To have a landlord paying a single council tax on such a property is a fair and consistent approach.

HOW COULD THE GOVERNMENT CONSULTATION ON CHARGING ONE COUNCIL TAX FOR HMOS IMPACT LANDLORDS? Anna Lewis, commercial director at Castle Trust Bank If these proposals are introduced, they are likely to lead to an immediate increase in rents and a spike in rental inflation—although the overall cost for tenants is unlikely to change as they are responsible for paying the council tax for their room. It will create a more level playing field for tenants to compare the cost of living in different HMOs and reduce a significant amount of administration, particularly for properties which have a high turnover. One consideration for landlords will be how they apportion the cost of council tax across the property if some of the rooms are larger than others. Overall, this seems like a sensible move that will ultimately make it easier for landlords to manage their properties and make the sector more transparent.

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Roger Morris, director of mortgage sales and distribution at Tandem Bank Case law and legislation can be applied by the VOA to determine if a unit in an HMO should have its own council tax band, which ultimately passes the responsibility of paying the tax from the landlord to the tenant. If they don’t pay, as long as the council tax is registered in the tenant’s name, the local authority can’t chase the landlord for any outstanding debt. However, the government now wants to pass the collection of the council tax onto the landlord. This means the landlord has more liability, more monthly expenditure and less profit, as they will likely not able to increase the rent—since some tenants are already struggling with paying rents and bills. Thus, this proposed change will cause a further negative impact on the profitability of the property that will ultimately be passed on to the tenant, especially in areas of high rental demand. A balanced approach needs to be taken.

Beth Foryszewski, senior sales relationship manager at Landbay The proposed changes to council tax banding would bring much-needed consistency and fairness for both landlords and tenants. Landlords in disaggregated areas that are unable to absorb rising council tax bills are forced to pass this on to tenants, making rent unaffordable in the process. Landlords are then faced with expensive void periods or the prospect of slashing their yields to have any hopes of remaining competitive. One aggregated council tax band not only makes the most sense in terms of ease and fairness, but it reduces unnecessary additional costs and regulation, and ensures properties remain more affordable for tenants. As residents and landlords face rising costs across the board, this should surely take priority for councils.

Colin Sanders, CEO at Tuscan Capital I really don’t think this will make much of a difference to either landlords or the PRS, for the simple fact that most professional landlords with HMOs in their portfolios already take control and responsibility for the council tax and utility bills for their properties. Relying on multiple tenants within a property to register, keep gas and electric meter readings and make the correct payments is an administrative headache, which most professional landlords will go to great lengths to avoid. The answer is simply to provide an all-inclusive HMO rental price which covers these costs; it can often be the turnkey solution that HMO tenants are looking for.

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SUMMER 2023

mindmap

Roger Morris, director of mortgage sales and distribution at Tandem Bank The main reason an article 4 is implemented is to protect an area and its residential status.

For example, Bournbrook was converted into HMOs to house students for Birmingham University over a very short period of time, with around 90% of the residential property having been converted—thus completely transforming the area forever and having a negative impact on the remaining families. The increased noise and rubbish generated was so impactful that Birmingham placed an article 4 to protect the city from further disruption. Cities like Plymouth are no different to any other in the UK and will welcome landlords who want to provide quality housing for families, while limiting the negative impact of HMOs and stopping families homes from being removed permanently from the long-term rental market.

Beth Foryszewski, senior sales relationship manager at Landbay While councils, such as Plymouth, may not like to admit it, the reality is HMOs form a vital part of the wider housing mix in the UK. These landlords provide accommodation for those at the bottom of the property ladder and, without good quality HMOs, lower income tenants, students and young professionals will have far fewer places available to them. This is especially true in a place like Plymouth where the local university has over 18,500 students—while some of these will rely on halls of residence, on‑site accommodation, or may still live at home, there would be a clear housing crisis without a strong supply of HMOs. The same can be said for those outside further education where traditional rental or full homeownership is either out of reach or not suitable for their lifestyle or career. As the cost of both of these increases, how will the council cater for those who cannot afford to live on their own?

Colin Sanders, CEO at Tuscan Capital Many local authorities have already brought an article 4 direction into effect, including Birmingham City Council, which has concluded that too many HMOs were being created, thus putting pressure on the local authority’s infrastructure (hospitals, schools, parking etc). In these areas, article 4 has had a positive impact on those compliant HMOs already operating in the newly regulated zones, as new HMO supply is very limited. It’s actually a good example of regulation being used to raise the bar for landlords and the standards of accommodation for HMO tenants. However, I’ve not seen any evidence that a nationwide implementation of article 4 is desirable or, in fact, being called for.

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Anna Lewis, commercial director at Castle Trust Bank With the cost of living crisis and increasing prices of mortgages and rental properties, an HMO can provide an affordable and important source of housing. This is particularly so in university towns, near hospitals to key workers, and for other employees who stay during the week and return to their home for the weekend.

It’s therefore important that local authorities take a sensible approach to regulate the number of HMOs in their area, avoiding overly onerous rules or restrictive limits on the number of properties allowed. A rational approach to HMOs based on local circumstances may benefit an area, but excessively restricting these properties will limit choice for tenants and may drive up rental costs.

SOME CITIES, SUCH AS PLYMOUTH, ARE LOOKING TO CLAMP DOWN ON THE NUMBER OF HMOS AVAILABLE IN THE AREA—WHAT EFFECT COULD THIS HAVE ON THE OVERALL PRS? Tanya Elmaz, director of intermediary sales for commercial finance at Together Despite the news that certain cities are looking to clamp down on HMOs, there is and always will be a high demand for them, driven by individuals who want to live independently but cannot afford self-contained dwellings—such as students or young professionals starting out their career. It’s fair that local councils want to balance these housing demands with the need to preserve the character of the local town and community, and the pressures of HMO living can bring issues such as limited parking or refuse collection. However, like everything, it’s a question of balance.

It’s about matching their number with the ever-growing demand for housing to ultimately have towns that aren’t oversubscribed with HMOs, while still offering a good supply of such occupancies.

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SUMMER 2023

mindmap

Roger Morris, director of mortgage sales and distribution at Tandem Bank The biggest one is that you need first to obtain planning permission for an HMO—this should only follow in areas that have an article 4 in place. Another misconception is around HMO licencing and planning—the licensing application is a completely separate process to the planning application; they are not one combined process as one would logically think. I see so many landlords who have an HMO that has a licence in place, but who have never applied for change of use from a C3 to C4 when they go for a remortgage and, ultimately, the application fails at the legal stage.

WHAT COMMON MISCONCEPTIONS DO LANDLORDS HAVE ABOUT FINANCING HMOS?

Tanya Elmaz, director of intermediary sales for commercial finance at Together Many think that it is easy to manage tenants themselves, but this isn’t always the best option. The actual cost of managing HMO lets needs to be factored into the overall financing—whether you do this yourself or employ a third party. The wear and tear must also be accounted for; more tenants can increase the chance of damage, so the cost of repairs is usually higher than a standard AST. Landlords also need to educate themselves on demand for HMOs in their local area before embarking on such an investment. In an over-supplied market, a very average HMO is not going to stand out from the competition, so making sure the standard of your property is high needs to be factored into the overall cost.

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Anna Lewis, commercial director at Castle Trust Bank One misconception is that a property always requires planning permission to be converted into an HMO. Generally, a house or flat can be turned into an HMO occupied by no more than six people without the need for planning permission, as this change of use is covered by permitted development rights (PDRs). Local authorities do, however, have the right to restrict or even remove PDRs for their whole area, or certain areas within it.

Licensing is also a common area of confusion when it comes to HMOs, as local authorities have different rules and regulations. For both PDR and licensing reasons, it’s always important for an investor to check the specific details of the location in which they are looking to buy.

Beth Foryszewski, senior sales relationship manager at Landbay For even the most experienced landlord, localised rules, planning and licensing requirements can all present a minefield. While some HMOs require different licences, some don’t require any at all. There are also article 4 directives which block traditional PDRs for HMOs. Meanwhile, each council will look at their licensing and legislation uniquely to their area—this certainly makes things more complicated and requires property investors to do extra research. Thankfully, some councils are proactive in providing online questionnaires for landlords to submit their property details and find out what licence and legislation it falls into. This makes it much more straightforward for landlords to work out what is required and for brokers to support their clients, especially those first‑time investors. Brokers play an important role in helping clients with their understanding of local requirements.

Colin Sanders, CEO at Tuscan Capital We’ve had many conversations with landlords looking for funding support to take advantage of the higher rental yields that HMO investments can offer. However, many deals fall through after the landlord has worked out the full costs and administration involved in running an HMO portfolio. The licensing requirements and the building regulation standards for HMOs now demand significant investment. In article 4 areas, formal planning approval is required, which adds another layer of cost and time, not to mention there is a high risk of planning being declined. While HMOs do offer higher yields, the costs and layers of compliance mean a landlord must work hard and make a real investment to achieve them. That said, thousands of investors find the situation workable and are seeing healthy yields from their HMOs. It’s just vital that they do their homework and establish if the HMO route is one they really want to take.

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Quintain Living’s Canada Gardens BTR development in Wembley Park, London (Copyright: Quintain)

insight

The great ascent of BTR Build to rent (BTR) is growing rapidly, offering a low-risk and resilient income. It’s therefore no surprise that numerous lenders are muscling in Words by Jeremy Bowden

SUMMER 2023

insight

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hile BTR is a concept that has been around in the UK for over a decade, only recently has it been experiencing strong growth. The government first explored BTR in 2009 with the Private Rented Sector Initiative, according to Neelam Saihjpal, BTR director at property specialist Centrick. This was followed by the government’s Montague Review published in August 2012, with the first units built the same year. The review was designed to boost BTR, and included measures to encourage investment in good-quality, privately rented homes to help meet housing demand.

Since then, the sector has gradually grown, both in terms of investment and the number of homes. In Q4 2022, around 242,500

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“FROM A PERFORMANCE PERSPECTIVE, BTR HAS PROVEN ITS INVESTMENT CREDENTIALS”

Pictured: Several Quintain Living BTR schemes and their amenities (Copyright: Quintain)

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SUMMER 2023 Quintain Living’s Canada Gardens BTR development in Wembley Park, London (Copyright: Quintain)

units had been completed or were in the pipeline: 78,700 had finished, 50,500 were under construction, and the remainder were planned.

Funding-wise, the latest Savills research revealed that over £4.3bn was invested in BTR in 2022, marking a fourth consecutive record-breaking year. While BTR investment volumes slowed in Q4 2022 as investors faced economic and political headwinds, levels have rebounded this year, reaching an estimated £1.12bn in Q1 2023, as revealed by Cushman & Wakefield’s latest BTR report.

Randeesh Sandhu, CEO and co-founder; and Daljit Sandhu, COO and co-founder of Precede Capital, say interest in the UK’s BTR sector had surged in recent years.

They give some reasons: “These include the chronic undersupply of high‑quality, well-managed rental homes, a growing interest in operational assets from institutional capital, [plus] investors increasingly willing to invest in BTR operators as well as the assets themselves.”

CITIES AND CRITICAL MASS London has been the obvious focus for BTR, but other major cities have seen significant activity, including Manchester, Birmingham and Leeds (an objective of the Montague Review), according to Ian Fletcher, director of policy (real estate) at the British Property Federation (BPF).

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Neelam says Birmingham and Manchester are the most established BTR markets outside London, “but Leeds offers the largest pre-construction pipeline and Edinburgh’s affluent population is ripe for city centre BTR development”. Of the £1.1bn invested in Q1, BNP Paribas estimated that 7580% was outside London. Most recently, it has spread to smaller cities such as Southampton and Aberdeen, Ian notes.

In London itself, BTR is expanding from central to commuter belt development opportunities. However, it remains a product for large towns and city centres, requiring a critical mass of private renters, boosted by overseas tenants looking for temporary homes.

TARGETED TENANTS For landlords, BTR offers good economies of scale due to managing multiple homes within a single development. Projects can be tailored to the occupiers targeted and, in general, tenancies are longer and more stable, reducing turnover costs, according to Tom Berry, asset finance adviser at Arc & Co. He adds that brokers can work with a single landlord or an operator managing multiple units within one scheme, simplifying the funding process, refinancing and eventual end disposal. “This also enables the broker to work on large-scale transactions

through one party,” he adds, which would earn brokers more commission.

Neelam states that BTR rents and income growth recovered quickly post pandemic, with strong rent collection, renewals and low arrears for landlords.

“From a performance perspective, BTR has proven its investment credentials.”

When it comes to BTR investments, James Saunders, CEO at Quintain Living, notes the importance of being responsive to tenant needs. In response to residents’ demands, the firm increased leases to an average of three years during the pandemic, up from 12–18 months before.

“We offer a package of services, including broadband, furniture, working with utilities to get better deals, lounges, rooftop terraces, podium gardens, and free gyms— that’s a huge amount of added value.”

Of course, this adds a premium to BTR rents—but the amount varies, according to Tom: “As with any rental market, the dynamics vary vastly from project to project, depending on a range of factors.

As such, it is difficult to apply a blanket figure that might apply to any premium.”

BTR properties also tend to be more energy efficient, primarily because they are new and built with green credentials in mind, which is increasingly important to tenants. One example of this would be Birmingham’s Great Charles Street

development undertaken by a JV between Apache Capital, Harrison Street and NFU Mutual. The scheme will include several sustainability features, such as air source heat pumps, solar photovoltaic panels, and the ability to source renewable energy for the site through the Renewable Energy Guarantees of Origin (REGO) scheme—all of which will contribute to the project’s energy performance and low Scope 1 and 2 emissions profile.

COSTS AND COMPLEXITY On the downside for landlords, large upfront investment is required for BTR schemes which, along with planning and construction risks, creates a significant barrier to entry for many smaller operators.

Another big problem, according to Ian, is a shortage of suitable land, which limits development opportunities. “There aren’t many places for 250-plus units in inner cities,” he says. Neelam also cites land values and build costs as major obstacles.

Another difficulty can be regulation.

“The government approach on planning issues at the moment is quite constrictive,” comments Ian. James agrees this is a hurdle, considering not all councils are aligned on their approach to BTR. Tom says: “Managing and, in some cases, educating the local authority is one of the biggest challenges when it comes

to securing planning permission. Local authorities have their own policies with regard to development, which can vary from one scheme to the next, and this creates a more complex process for the developer. The key to mitigating this is for the developer to work closely with the councils to ensure that the proposal aligns with the policies. This may involve negotiation on the percentage of affordable housing within the scheme or making alterations to the design.”

LENDERS IN ON THE ACT There is no shortage of those willing to provide finance to the BTR sector, although some question whether funding flows will be able to keep up should growth continue as expected. James shares that Quintain taps a wide range of lenders that are attracted by the low-risk and resilient income stream, professional operation, and high levels of compliance. Financing has “broadened out”, he says. “There are debt and equity investors; a lot prefer debt because they’re getting guaranteed interest rates and repayment returns,” he explains.

Precede agrees that multi-family BTR is popular for debt financing because the tenancy risk (in theory) is lower, and demand for housing in locations such as London means there is a low likelihood of high vacancy rates.

Ian notes that interest on loans for

“AS THE DEVELOPMENT PIPELINE EXPANDS, THERE IS A DANGER THE FINANCE MARKET MAY FAIL TO KEEP PACE WITH DEMAND”

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SUMMER 2023 BTR is slightly higher than in 2022, but the sector is never short of capital. This comes from multiple sources, including pension funds, private equity, overseas (especially from investors with exposure in their own countries, such as US operators of multi-family projects) and sovereign wealth funds, as well as most of the major UK banks. He highlights how BTR offers a great ratio of assets/liabilities for pension funds due to low risk: “Pension funds are now prepared to take on construction and sometimes even planning risk, whereas before they would just dip their toe into the sector by buying into stock from housebuilders. Now they are investing at the start and dictating what they want.”

While Tom claims there are now several lenders serving the BTR arena, he notes there are few, if any, obvious examples of finance providers that operate in this sector exclusively. He also warns that flows may struggle to keep up with anticipated growth. “Given BTR’s current popularity as an investment sector, there is currently a sufficient depth of funding options but, as the development pipeline expands, there is a danger that the finance market may fail to keep pace with demand,” he says.

Precede’s founders comment that recent market volatility has cut banks’ appetite for risk and driven many to scale back their lending, with the gap being filled by non-bank lenders. These include Precede itself, which in March provided a £188m five-year loan to fund the development of Great Charles Street in Birmingham. The lender’s co-founders add that banks may now require additional forms of recourse or security from their sponsors if a loan goes higher than a certain LTV and/or debt yield, depending on circumstances.

Overall, lending criteria for BTR schemes vary, according to Randeesh and Daljit: “Some lenders focus on LTC, some on LTGDV, some on debt yield/ICR. In reality, most lenders focus on all of these things and the loan is impacted by who the borrower is and where the asset is.”

When comparing the ease of accessing finance compared to the BTL market, traditional BTL mortgages are very different from the institutional lending involved in BTR. The scale, commercial nature and complexity of

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BTR schemes—adding to the overall risk—mean that, in general, loans for these projects incur far more rigorous due diligence, with lenders scrutinising financial stability, gearing levels and management records, as well as detailed information on the likely performance of the scheme involved, including tenant demographics and rent levels.

Quintain’s James claims lenders are now keen to invest at 50% LTV (down a bit from the peak, which was up to 75%) a debt yield of 6-7%, and interest cover of 1:1 to 1:3.

TWICE THE SIZE IN FIVE YEARS BTR is expected to continue growing rapidly, with Knight Frank claiming the market could nearly double in size to £102bn by 2028.

Critical drivers are the shortage of affordable housing in the UK—particularly in major cities—plus changing attitudes towards renting and demand for higher standards and better services. On top of this, Tom notes that climbing interest rates had recently escalated the necessity for rented property in general, made worse by the removal of Help to Buy and BTL landlords exiting the market.

“BTR’s popularity will increase due to the desperate need for housing supply, the shift towards renting in the short term, changing tenant expectations, and the longer-term institutionalisation of rental markets,” add Randeesh and Daljit.

So, could BTR pose a threat to traditional BTL properties? According to Precede’s founders, it already does: “While BTL landlords are already feeling the pressure of interest rate rises and the costs of regulatory compliance—such as the proposed new EPC requirements—BTR offers a quality of service and amenities that have historically been sorely lacking for consumers in the national rental market.”

However, BTR cannot fill all the gaps left by retreating BTL landlords. It is believed that such schemes will remain large scale and focused on major cities, and are unlikely to extend to smaller and less densely populated conurbations. For this reason, along with its currently small scale, most feel BTR is not yet a threat to BTL’s place in the market. However, Neelam

“PENSION FUNDS ARE NOW PREPARED TO TAKE ON CONSTRUCTION AND SOMETIMES EVEN PLANNING RISK. THEY ARE INVESTING AT THE START AND DICTATING WHAT THEY WANT” says it could become one eventually, with “private landlords unable to compete with the resident experience in BTR”.

While BTR might not solve the UK’s housing crisis, it can certainly contribute— not least by channelling new sources of capital into homes and providing muchneeded supply at scale. The sector’s high and reliable returns and raised standards are expected to continue to attract investors and tenants, although growth may well be constrained in the UK by a lack of opportunities in prime locations.

Nevertheless, Precede’s founders maintain BTR may help, even though it is difficult to say how far it offers a solution to the nation’s lack of housing: “There is no silver bullet to such a complex and continuously changing issue, but it will certainly play an important role.”

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Words by Andreea Dulgheru

SUMMER 2023

When people were unable to travel abroad during the pandemic, the holiday let market blossomed on the back of the staycation boom. Since the borders reopened to new and exotic places, many in the BTL sector are left wondering if the holiday let bubble is set to pop—especially with government regulations knocking at the door. Seven industry experts—Alison HoughtonCorfield, director at Master Private Finance; Barry Luhmann, head of BTL mortgages at United Trust Bank; Grant Seaton, head of intermediary lending at Cumberland Building Society; Narinder Gill, associate at Coreco Specialist Finance; Samantha Demuth, head of regulated and term finance at Finanze; Louis Theed, property finance specialist at Propp; and John McCaffery, tax partner at Alexander & Co Chartered Accountants and Tax Advisers—share their views about the latest proposals and weigh in on infuriating property influencers and how some investors can be ignorant on what is really required.

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Andreea Dulgheru: Despite all Covid travel restrictions being lifted in the UK in 2022, reports last summer highlighted an increase in the number of holiday let properties in the UK market. In your experience, have you seen a rise in demand for holiday lets?

Alison Houghton-Corfield: From a master broker perspective dealing in specialist finance for holiday lets, we’ve seen a massive increase, but more so last year. As for the reason why I think they are so popular, it’s purely down to yield. A lot of people have seen that, since the pandemic, holiday lets are the place to be, as you can earn more money than from a standard BTL. Narinder Gill: I’ve seen a large increase in interest in holiday lets derived from the pandemic. It’s an interesting space and certainly not a market I see diminishing any time soon; it won’t be a flash in the pan.

Barry Luhmann: It’s definitely the yield that drives this market, or people simply wouldn’t bother. It’s far easier to rent on AST terms than a holiday let, plus you’ve got extra work and costs that you suffer as a holiday let landlord—but yields are far superior in the vast majority of cases.

AD: What would you say are the biggest misconceptions when it comes to financing holiday lets?

Louis Theed: One of the things that I come across quite regularly is education—landlords don’t know they need a holiday let or other specific mortgage to rent their property out on that basis. I think there’s a big educational piece to be done across the industry about what type of finance is required for these lucrative investments that they’re delving into.

NG: In my opinion, I’d say it’s the experience needed. There is a lack of understanding from landlords, who think it’s as easy to get a holiday let financed than it would be any other type. Lenders ultimately want to provide finance

to individuals who have got a proven track record in managing tenants and properties. To take on such projects, it’s not a case of leaving it to [holiday cottage rental agency] Sykes to manage it; there’s an onus on you as landlord to make sure all your affairs are in order and you’re aware of your obligations.

Samantha Demuth: It’s a business at the end of the day, isn’t it? They’re starting a business, not just a standard BTL, which could be relatively straightforward compared to a holiday let, where it’s obviously a lot of effort. One of the things I have noticed—especially off the back of a lot of property training events that take place within this sector—is that a lot of investors come to us thinking they can get a huge house to let out with lots of bedrooms, and get a commercial valuation on day one. Landlords need to be educated on what it really means to get into this market and to be realistic as well.

AH: Samantha touched on something that will wind me up at times: all these presentations and investor shows that are being promoted online by influencers. They get people in, sell them this fantastic dream of owning a portfolio worth so many millions, take money off them, and then walk away. But the people attending don’t have the understanding and education that they would have got if they’d spoken to a broker or lender. I don’t know how they would do it, but there’s got to be some kind of regulation around that. This has got to be addressed somewhere down the line.

Grant Seaton: As a lender, we found a lot of people were already in the marketplace but had BTL mortgages in the background, so they were actually breaking the covenants of the mortgage.

During the pandemic, we also saw some people who were registered for business rates while others weren’t, so it was quite a task for some people to get support through that period. If there is any lesson to be learnt, it is to have everything right, investigated and researched fully.

AD: John, from a tax point of view, what do you see as the main misunderstandings?

John McCaffery: For furnished holiday lets, there are a lot of conditions you need to meet in order to qualify. To fall within the regime, it’s got to be furnished to a standard that’s available for letting out, which some of these properties aren’t. It’s also got to be available for let for at least 210 days a year, and you need to let it for 105 days a year. Plus, you can’t let it to any one individual or party for more than 31 days in that period. It has to be a proper business. That said, if you meet all those conditions, there’s up to a 10% tax rate on disposal of the property [under the Business Asset Disposal Relief scheme]—depending on its value—and you can get tax relief for the assets you buy for the property, like furniture, white goods, plant and machinery, and other fixtures and fittings. In addition, you can put the income you get into a pension, which you can’t with normal residential property. On the flip side, you need to register for VAT—you don’t have to as a residential landlord—and then you’ve got the compliance of having to do quarterly VAT returns. Perhaps the biggest misconception, though, is that people think furnished holiday lets qualify for inheritance tax relief, but they generally don’t. So, if most of the business is letting out the property and its activity is wholly or mainly property investment, you still have a particularly chunky inheritance tax liability coming along if you’re not careful and don’t plan for it.

AD: From a funding point of view, what would you say are the biggest differences between regular BTL and holiday let mortgages?

BL: The biggest one for us is how you work out the rent for the ICR. I don’t think all lenders in the market do this, but we’ll use agency letters for low-, medium- and high-season rental. We’ll also use actual income if a landlord is remortgaging a property and has got nearly 12 months or more, if that can be validated and proven with some kind

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SUMMER 2023 of agency or bank statement. However, the majority of [our] customers are purchasing or converting from an AST to a holiday let and relying on the agency letters, which we have to scrutinise intensely. It’s not like sending a valuer out who gives you one figure.

you’re an experienced landlord and have been doing it for many years, but it’s always worth not skimping on the management cost. Specialist managers are not cheap, but they’re there for a reason, and I’d strongly suggest the less experienced landlord sticks by them.

GS: A couple of additional things we would look at now would be the top slicing of income to be able to support the borrowing. We’ve seen that coming up a little bit more as costs start to go up for people. We’re currently looking to increase our ICR at the moment, because of [this]. As a result of the recent cost of living price increases, there has been evidence of some owners having to subsidise payments.

That’s why we’ve started looking at top slicing more and have a process in place for that—if there is substantial background income that can evidence and support it, then we’ll use that.

SD: Also, a lot of extra research and due diligence has to be done on the areas they’re looking to purchase in to see what the demand is for a holiday let. You also need to consider whether the property be used for any other situations when the holiday season is perhaps taking a dip.

It’s important to look at what is available in that area for excursions or other activities, and how else the property can be used. I think some landlords opt for a holiday let in a nice town purely for emotional reasons because they like the look of it but haven’t thought about it from a business point of view. A lot more research must go into the front end—it’s a business at the end of the day.

NG: Grant’s made a valid point there about top slicing, and I’ve seen instances where the less experienced landlords looking at holiday lets really do underappreciate seasonal demands.

They don’t understand the implications of having a holiday let in the middle of January not being tenanted for five or six weeks, and don’t take on board how much it will affect their cash flow in the event of a two-month tenancy break, work required on the property, or if there’s increased competition. You’ve got to keep on your toes with these types of properties, because they’re now two a penny for rent in the right areas.

Landlords have got to make sure their properties stand out and are lettable.

AD: Based on the increased competition and the danger of not having a regular stream of income, what should landlords do to mitigate these issues?

NG: I’d say having reputable management companies and specialist property managers in place, rather than relying on an agency or self-managing it if you don’t have the experience. There are certainly plausible reasons to self-manage if

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JM: Landlords also really need to think about ownership structure before they purchase—it gets a bit messy if done afterwards—as well as their reporting obligations in relation to tax returns. I spend a lot of my time sorting out a lot of messes that haven’t been thought about properly…

SD: Do you mean set it up in a limited company versus an LLP? JM: Yes, as a limited company. LLPs don’t have the advantages that people think they do, and there’s actually a lot of misinformation about them.

Company structures, in the right circumstances, are very useful for these things and retain the tax advantages.

AD: Is the surge of holiday let properties in the market regional, or are you seeing this nationwide?

AH: When the pandemic first hit, they tended to be all around coastal areas— that’s where the demand was as people were isolated and wanted freedom.

But, in the past six to 12 months, it’s been more spread out for us.

LT: I’ve seen enquiries for all over the UK and some interesting opportunities being identified. I had one client that was looking to buy a property quite near to an airport, and they were setting it up purely for short-term accommodation before people fly, which is obviously very different from someone buying a coastal property to rent out as a traditional holiday let. I think that landlords are getting more inventive with the type of opportunities they’re trying to identify.

AH: I’ve seen a few around a specialist hospital as well, where people were looking to buy properties there so they could rent them out to families who were coming to look after ageing parents. I’ve seen quite a few of them over the past couple of months.

GS: I think national parks have always been the typical, historic areas where people would look to purchase a holiday let. But there are situations where investors are thinking outside the box when it comes to the quieter seasons. Let’s say there is some industrial activity happening in that area—a nuclear plant getting built, for instance. Landlords will think if they get something within travelable distance of that, they could fill the property with contractors coming from other towns and cities to work on a project over the winter season as well. I’ve seen a little bit of that and it makes sense.

LT: On that subject, I’ve seen a number of people converting HMOs into short-term accommodation targeted specifically at workers, for example near hospitals.

But I think there’s a question about property standards that comes up, too.

Some landlords that are converting existing BTLs into either serviced accommodation or holiday lets may underestimate what they need to do with the property in order to keep it occupied and generate a good income.

Some landlords opt for a holiday let purely for emotional reasons because they like the look of it, but haven’t thought of it from a business point of view

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SUMMER 2023

There needs to be a government approach to regulation but, ultimately, it’s difficult to apply a blanket policy when certain areas need more regulation than others

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NG: We saw quite a number of these types of transactions in and around Birmingham when the Commonwealth Games were on; landlords were targeting individuals coming to watch the games but, before all that, the contractors. At the time, this was fantastic, but you’ve got to be thinking: what are they doing now? There’s got to be an air of caution when looking at high-turnover, volumetype letting, with the usage of Airbnb and these wonderful apps that are out there, because you can fall very quickly on your face if something changes, and you don’t have that surety of a coastal town.

SD: Yes. I agree with that. We’ve seen a few of our investors who are trying to mitigate that and utilise some of the specialist BTL products that allow either an AST or a short-term let; if they can make it fit on an AST figure rather than the holiday let income, then they’ve covered both bases. So, when we can get those through, they’re obviously nice and easy because we know they can fit on both sides.

BL: Yes. We probably see just as many applications for the traditional coastal holiday lets as we do for the city centre, whether that’s in Birmingham or Manchester for weekends away, or hen and stag nights, or in places near national parks, such as the Yorkshire Dales. These generally make sense. It’s the ones that seem to be nowhere near anything— where you wouldn’t spend one night, let alone seven—that we tend to turn away or accept on an AST. We’ve done a few of those, and they either concede or they take the application somewhere else.

AD: How is the climbing number of holiday lets impacting the overall PRS? GS: The Lake District itself really started to suffer with housing for seasonal staff, because people had moved from HMOs and BTLs into furnished holiday lets instead, causing a lack of housing.

People were having to stay maybe 30–50 miles away from where they were working, so businesses were having to bus people into work.

NG: I think there’s got to be an air of regulation around [holiday lets]. There are some councils now in certain parts of the country that are putting in more red tape and planning permission requirements. There needs to be a government approach to regulation but, ultimately, it’s difficult to apply a blanket policy when certain areas need more regulation than others.

AH: I completely agree with Narinder; the government cannot bring a broadchurch approach to this. It’s fine to bring legislation in, but there’s got to be a consultation with local councils to establish how many holiday let properties will be allowed in each area.

The government has got to sit down with local councils and the industry to find out where the problems are, who it will impact, and what they need to do.

AD: That brings us to the proposals that were announced recently about new planning permission requirements for holiday lets. How do you think this will affect the PRS and those landlords looking to invest in holiday lets?

GS: What we’re seeing in Scotland now with the licensing regime that’s come in is that if somebody wants to go out and finance a holiday let, they’ve got to wait for the licence to be approved.

Then, if they’re in a tourism-control zone, they’ve got to get planning approval as well. Now, the exiting owner doesn’t want to wait four or five months for that to all go through, and that might play into the long-term let sector’s favour; if a property can be used as a longterm let, they’ll dispose of it that way.

We’ve learnt very quickly that [these changes] seem to have slowed down the Scottish market. What we’ve had to do to get around them is support landlords, providing they’ve got sufficient other income to support the mortgage until they get the licence and planning.

However, not everyone’s got deep enough pockets to be able to evidence that.

AD: Do you think the new proposals will drive holiday let landlords away from

this market and slow down activity in coastal towns and tourist hotspots?

BL: You’d think it would slow things down… If anything, I think this is just going to make this sector more professional, like HMOs, which is good. When you go and rent a holiday let, you want a nice, secure, safe property when you turn up. So, this will be a good thing in the long run.

AD: Alison, you mentioned the need for regulation in this sector, and it seems like the government is trying to make that happen, although it’s at proposal stage. In your opinion, does this regulation cover all bases, or are there still gaps that need to be filled in?

AH: It covers everything. However, what I think the government needs to do is roll out the consultation to lenders, brokers and landlords. I know they’re going to do a questionnaire, but how does that get policed? I think there’s got to be stronger policing [for the responses], and there’s quite some way to go yet until they tighten this all up. A lot of people have seen holiday lets as a get-rich-quick thing that they can do, without understanding the implications.

Once they regulate and tighten it up, it will be better for everybody.

LT: I think that’s a difficult question to answer because, until something’s actually been put into practice and you can see some of the pitfalls or gaps, it’s difficult to say. But, as long as it’s open for changes retrospectively, and that it can be changed on a regional rather than nationwide basis, that’s the easiest way of approaching it. Otherwise, you’re setting something in stone without allowing any room for feedback.

AD: The next regulation initiative I wanted to talk about is the planned HMRC crackdown on owners of second homes who pretend to let them out as holiday lets just to avoid or save on tax. John, from your experience, is this prevalent?

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SUMMER 2023 JM: No, not so much. The system in this country is one of self-assessment. In terms of its own compliance process, HMRC has built a supercomputer called HMRC Connect. At a glance, it can press a button relating to a taxpayer and access data from 30 different sources.

This includes all sorts of information about a person, including the Land Registry. From this, they can start asking questions, should they want to. Not everybody’s going to get an inquiry. One area HMRC is looking at on landlords, which is quite clever, is the rental deposit scheme. You’ve got to keep four or five weeks’ worth of rent on deposit in a government-registered scheme.

Well, HMRC is extrapolating that out to what the annual rent is, and seeing if they’re returning that amount on the tax return—and a number of landlords aren’t. So, the problem for HMRC is getting behind the figures. If you do have a second home, the general tax evasion is if you’re saying it’s a furnished holiday let, and you’re claiming a 10-20% rate of tax, rather than the 28% tax on disposal.

In that instance, yes, they can then go back over your tax returns for the past few years and see if you have returned the income for that furnished holiday let, and if you’ve met the conditions for that property. If you haven’t, they’re coming after you for either the income or for the disposal on the dwelling. Often, a lot of people do it without malice, thinking they haven’t done anything wrong. The furnished holiday let regime is actually pretty specific and, unless you meet all the requirements, you’re not qualified.

I think every time you mention that HMRC is investigating somebody, it sends a tremor of fear through an industry, and that’s kind of what they intend to do—they will target two, three thousand people, and that will prompt a lot more people to come clean, for want of a better phrase. It’s quite psychological, the way they go after tax. But they haven’t got the resources to check every single tax return; that’s why it’s self-assessment rather than checked assessment. There is also something called the Let Property Campaign, which gives you slightly better terms if you come clean, because

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HMRC knows landlords are notorious for not returning their income. The vast majority of landlords do, don’t get me wrong, but as a percentage compared to other trades and businesses, landlords are pretty high up there.

AD: Would you say involuntary tax evasion is a result of landlords’ lack of knowledge when it comes to taxing holiday and short-term lets? And, if so, what is the best way to abate this?

JM: Absolutely. The best thing to do is talk to a tax adviser.

AH: Yes, I often find that as well. We’ll tell clients we can’t give tax advice and they need to speak to a tax adviser, but they’ll ring you two days later and ask you the same question.

AD: Going back to the taxation process, there’s been quite a bit of talk with regard to an overhaul of the taxation system for holiday lets. There are two questions within this: do you think that’s going to happen and, if it does, how is it going to affect the PRS market?

SD: Oh yes, you shouldn’t do that!

But I think [it would be good] to have the knowledge in our toolbox, almost like a factsheet, to tell clients, “This is who you need to speak to”, so you’re raising awareness to the borrower at the right time for them to be prompted.

Because they might just go and speak to their accountant who might not know. They must speak to a specialist tax adviser. It’s having everyone within the industry know the checkpoints of what you need to do and when, rather than just doing your siloed action of just getting the finance and not speaking about anything else.

JM: I hear on a weekly basis that there’s got to be an overhaul of some area of the tax regime. Politically, furnished holiday lets aren’t particularly contentious and, as a result, I wouldn’t expect any large overhaul of this—I would, perhaps, expect a little more compliance, and people digging into whether or not properties do qualify as furnished holiday lets. It’s a very specific regime: if you don’t meet all those conditions, you’re not a furnished holiday let, and you’re just back into the mainstream PRS regime. I would say there’s probably enough regulation for holiday lets.

However, I think more education is required. If you are not speaking to a tax adviser and you are looking for a furnished holiday let, you only get piecemeal information that would tell you about things like capital gains and trading profits. What it wouldn’t tell you about is VAT, interest relief, or what you need to do if you have an inheritance tax exposure. So, I think it would be more useful if there was more collated information about your tax obligations as opposed to further regulation.

LT: I agree entirely. We caveat every conversation with, “Go and get tax advice here”. But one of the things that we come across quite regularly is that the landlords who are proactive in seeking out professional advice tend to go to their accountant for tax matters, rather than an actual tax adviser, which obviously isn’t the right thing to do. But then, people don’t like paying for advice, even though it’ll save them a fortune in the long run.

AD: There is one more piece of legislation that I wanted to discuss with you all, and that’s the change in requirements for holiday lets in Wales, which came into force this April. Now, the property needs to be made available for 252 days and occupied by paying guests for 182 of them in order to be eligible for business rates—otherwise, landlords pay the regular council tax and, possibly, a premium on top of that.

SD: I was just thinking of that crosspollination of knowledge between industries. We’ve all got a duty of care, and while I know that we [as brokers] can’t advise on tax…

JM: Sorry to interrupt you, Sam, but one of the biggest problems I find is brokers giving tax advice.

There’s a big educational piece to be done across the industry about the finance needed for these lucrative investments they’re delving into

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SUMMER 2023

There’s got to be an air of caution when looking at highturnover, volume-type letting, with the usage of Airbnb and other apps that are out there, because you can fall very quickly on your face if something changes

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Are you seeing more landlords retract from this market because of this?

LT: I think it’s shone a light on someone treating it as a business rather than as a side hustle. Someone with a holiday let who wants to qualify for some tax advantages needs to be more focused on their occupancy rates in order to qualify for these benefits. So, they’re thinking: should they charge slightly less and reach an occupancy target? Or should they focus on profitability and take the tax hit? I think that question alone has drawn more attention to their investments and made them seek out education.

BL: Broadly, it sounds fair because, if you are letting this property for more than half of the year, then you’ve got a business. If you’re letting it for less, then it’s arguably a side hustle that, for the majority of the year, is empty or being used as a second home. When it boils down to it, I don’t think lots of councils are overly worried about fully occupied holiday lets, because they bring in lots of tourists and, therefore, income. They’re probably more concerned about second homes that sit there for most of the year unoccupied, and nothing happening in that local economy. I can see where this is aimed at: the side hustle.

LT: I also think it sounds fair to focus on keeping a property occupied—the effects of an occupied property on a local economy are massive. A colleague’s daughter stayed at an Airbnb recently and, when she got there, the owner told her the local pub was closed and that there was only one shop, which closed at 7pm—that’s because the majority of properties in the area were second homes or holiday lets with seasonality. So I think a regulation like this, to encourage occupancy, is nothing but positive.

AD: We’ve talked about quite a few regulations, and it seems the government is keen to drive away amateur holiday let landlords who are doing it just to make a quick buck. Overall, will these regulatory changes burst the holiday let ‘bubble’?

LT: I don’t think you’ll see it burst. I think you’ll probably see landlords who have been successful pick up more lets and build a portfolio of those types of properties. I don’t think you’ll necessarily see an impact in the volume of properties—you might just see more professionalism and people with a portfolio.

GS: I agree. People who have just got a side hustle, one property on the go, might exit, and then those who have got the economies of scale might pick up a few extra in their portfolio.

BL: Yes, I don’t think these tax changes alone are going to particularly alter the trajectory. We’re probably going to see another 12 months of growth, but we might see a slowdown in a year’s time.

NG: The regulations will separate the wheat from the chaff, and I think those who see [holiday lets] as a quick win—a get-rich-quick scheme—will soon realise it’s nothing like that. The more professional, business set-up individuals will see hardly any changes.

That’s how they’ve been running their operations for a number of years, and that’s why they’re successful.

looking to implement, I’d like to know what one thing you think should be brought into this market to help the holiday let industry and the PRS? GS: Housing supply would help, but that’s quite a generalist approach!

LT: I would say compulsory landlord education. Narinder mentioned it earlier, and there’s been talk historically about people having to meet a minimum standard to become a landlord. I think that should be something quite prominent because, without the owners understanding their obligations, it’s difficult to provide good-quality housing stock.

NG: Yes, I’d even like to see an approved landlord status added—something to evidence that they’ve got the necessary minimum requirements to ensure quality standards.

SD: Agreed, and you could have boltons for different sub-sectors, since holiday lets are very different from standard ASTs. I think education is key for this industry, for sure.

SD: The number of enquiries I get for holiday lets has not dwindled, so I don’t think it’s a bubble that is going to pop any time soon. Landlords are becoming more savvy to the amount of profit they can get from it and are doing a lot more research around the topic, especially how they can utilise the short-term let industry for other areas in addition to holiday lets.

AH: Yes, there is no holiday let bubble bursting. And I agree with Grant—the get-rich-quick landlords will be the ones who won’t stay in the market as long, and the other more established landlords who have a business model that fits this rental type will be the ones who’ll pick off these properties along the way.

AD: Finally, while we’ve talked a lot of about what the government is

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SPECIALIST FINANCE

SYMPOSIUM

LIM I AV TED AI SE LA AT BL S E

2023

Join us for an afternoon with the titans of the industry Panel 1: Development Finance Panel 2: Bridging Finance Panel 3: Buy-to-Let Panel 4: Commercial Mortgages

Amplify your knowledge

The interactive afternoon, based in the theater at The Courthouse Hotel in Soho, will feature four panel discussions where you can ask leaders in the industry your burning questions. Guests will be able to network over drinks, snacks and popcorn.

Join us on 20th June at 3pm until 7pm to amplify your knowledge among the titans in the specialist nance industry.

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Louisa Sedgwick

interview 40

DO WE HAVE THE PANACEA FOR AN AGEING LANDLORD MARKET? After joining Paragon Bank as commercial director for mortgages in April this year, Louisa Sedgwick talks about her ambitions for the bank beyond finance—and why succession planning for older landlords is vital

Words by Andreea Dulgheru

41

SUMMER 2023

e a r s a g o — b e f o r e she became the industry p o we r h o u s e she is known to be today—Louisa had one career dream: to become a policewoman. Sadly, due to her being shorter than the height requirement at the time, fate took her on a different path, one that saw her join a youth training scheme for travel and tourism. After a couple of years there, Louisa landed a mortgage underwriting job at Bradford and Bingley in 1992. She worked at the firm for 20 years in numerous roles—including BDM, regional sales manager, head of sales, and head of thirdparty relationships—until she decided to depart and set up her own consultancy business. “I thoroughly enjoyed running my own consultancy as it meant I could spend lots of time with my daughter, who was three at the time,” reminisces Louisa.

Three years later, she was approached to take on a role at Leeds Building Society, where she became head of sales. “It was a fantastic role, and Leeds Building Society is a brilliant organisation with the most amazing culture—and when you experience such a great culture and you have to leave it behind, you always try to get it back.”

At that point, Louisa’s reputation resulted in her being headhunted to join Vida Homeloans, an opportunity she ended up taking. “When I joined them, they didn’t even have the regulatory permission, so it was a bit of a risk moving from what was a fantastic role at Leeds Building Society to something that was bright

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lights and great excitement. However, working at Vida Homeloans was a great experience, as it was basically building a brand new lender from scratch,” she states. While working at Vida, Louisa also became the first female chairperson of the Intermediary Mortgage Lenders of operating within the BTL sector. They Association (IMLA) in 2020, a post she managed to get through some challenging thoroughly enjoyed and is really proud of. economic cycles and still perform strongly.

While her first official foray into the And the people at Paragon are so incredibly world of BTL came during her time at warm and welcoming; this culture was Bradford and Bingley’s Mortgage Express the largest driver for me,” says Louisa. subsidiary, it was at Vida where she became a BTL finance expert. “When I started my On the green brick road career, specialist finance wasn’t even heard One of the biggest things for Louisa when of—it was very standard and vanilla. The considering a new role is how much value specialisation she can add to has evolved over that company—a the years and it’s rationale that become more also contributed interesting, and to her decision “IF THE LENDER, I would tend to join Paragon. to migrate to “The brilliant BROKER AND the intriguing thing about LANDLORD things, rather Paragon is that than the steady it’s got such a COMMUNITIES WORK ones. So, as the great platform TOGETHER, WE CAN specialist market to start with as has evolved, so a well respected DO WONDERS” have I. There are and successful so many more brand.

So customers you you think to can support yourself: what who need that can I add to this? specialist kind of product. Only when I And there are some elements that I reached Vida did I recognise there was would love to implement and that I’m a wider scope to help more clients.” going to get involved in,” she states.

After four years at Vida, Louisa moved One of these big projects focuses on to Hampshire Trust Bank for a year as the major task of retrofitting properties managing director for specialist mortgages, in the UK and supporting landlords before settling into her current role at on this journey. “A retrofit product of Paragon. The decision to join the bank some kind is an absolute must at the boiled down to two main characteristics: the minute, regardless of whether the lender’s longevity in the BTL space, and its legislation changes; as a country, we’ve great work culture. “Paragon has a fantastic committed to becoming carbon neutral, proposition and reputation, and 30 years so we need to head in that direction.”

According to her, it is not only government deadlines that are pushing landlords to consider retrofitting, but also tenants’ increasing demand for greener and higher quality properties. “What we’re now starting to see are tenants saying they don’t want to put up with substandard homes and, with that, landlords are going to have to react to that probably more quickly

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SUMMER 2023 From cradle to grave Louisa’s second remit will focus on building and sustaining a “BTL property lifecycle”, to ensure that the rental homes sold by older landlords retiring remain in the than they would ordinarily think about PRS. This is a growing issue, as recent carrying out property improvements.” data from Hamptons shows that nearly Louisa and her team are working on three out of four (73%) landlord sales building a proposition that will both were due to around 140,000 landlords support the bank’s existing customers retiring in 2022. “The last thing we want and attract other landlords who are not is a deluge of properties leaving the PRS,” working with Paragon. To do so, the lender she warns, highlighting the growing tenant is currently assessing the BTL properties demand. “We need to retain BTL dwellings on its books and using this information in the sector. So, the second task I have to to design and build a tailored offering. think about is how we work for lifecycle “We’re really management fortunate we and succession have in-house planning surveyors for older “NON-BANK LENDERS who can give landlords, as us loads of well as how WILL HAVE CHALLENGES intelligence that works OVER FUNDING BECAUSE a r o u n d with new properties and landlords THE SECURITISATION their quality. coming into MARKET IS NOT FREELY We’re sat on a the market, gold mine of as they need OPEN—AND, WHEN THEY i n fo r m a t i o n , support too,” CAN SECURITISE, IT’S which makes she explains. my life a To this end, QUITE EXPENSIVE” lot more Louisa shares interesting— with me her and a bit idea to create e a s i e r . ” a dedicated In terms of the specific elements of landlord hub to connect old and young the finance proposition, Louisa tells me property investors with each other, as the bank is considering introducing rate well as brokers and other third parties, to discounts for landlords undertaking facilitate and support property transactions improvements to make their properties between them. While she clarifies this is still more sustainable and boost the EPC very much in its early days—she jokingly rating. These will complement its existing calls it “the Sedgwick brainchild”—Louisa green product range for investors buying is confident this idea will be the panacea properties rated A-C. In addition to this, the for this issue, and is hopeful it will receive team is looking at how to offer its existing support from her colleagues at Paragon. specialist finance products—including While these tasks are not easy, Louisa development, short-term and BTL term is determined to make them come true to mortgages—as a holistic package to ultimately establish Paragon as a provider support landlords throughout the entire of advice and support throughout a retrofitting journey. “We’ve already got lots landlord’s lifespan. “Ultimately, we want to of aspects available to landlords, but think have cradle-to-grave management, working there’s probably quite a bit of work that needs to be done to tie that all together.”

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with landlords at the very beginning of their career, throughout, and at the end of it, while also trying to upgrade their properties over that time to make sure that we’ve got great rental stock on the market. There’s quite a lot to do, but this excites me massively because you can see an end goal where you can retain and have good quality properties within the PRS. If I can build something that supports all of that, then that’s absolutely brilliant.”

Those that want to borrow more money will have to revaluate the situation, while those who want to retain the same amount borrowed will have to pay more for that mortgage,” explains Louisa, adding that this puts landlords in the tricky situation of finding a balance between increasing rents to maintain their mortgage payments while retaining their good-quality tenants.

According to Louisa, finance providers also have their own hurdle, particularly Resilience, rents and interest rates Looking ahead at what the future might non-bank lenders which may find themselves hold for the struggling BTL sector, Louisa believes with funding lines.

“Nonit will continue bank lenders its strong “WE WANT TO WORK will have performance, WITH LANDLORDS AT challenges despite the THE VERY BEGINNING, numerous over funding because the implemented THROUGHOUT AND securitisation and proposed AT THE END OF THEIR market is not government regulations. freely open— CAREERS, WHILE TRYING and, when they “Landlords TO UPGRADE THEIR can securitise, are incredibly it’s quite resilient, and PROPERTIES” expensive. tenant demand is growing; So, what you might find t h e r e ’ s is some of always going to be a need to support and house these more innovative lenders and the tenants, so I think there’s some smaller non-bank finance providers amazing opportunities within the PRS.” being acquired by larger bank lenders.”

Nevertheless, Louisa is confident In terms of specific trends, Louisa expects to see sustained demand for HMOs, in the strength of the market, stating as they offer high yields for landlords that plenty of opportunities are still and a cheaper housing alternative for available. “I think we’ve been through tenants navigating the cost of living what was probably the most challenging crisis. On top of this, she considers time in the BTL sector. We’re coming landlords will continue to diversify out the other end and, from here on, their portfolios to ensure profitability. it’s going to be just growth. And, if the However, there is one big obstacle that lender, broker and landlord communities many landlords will face: higher mortgage work together, we can do wonders.” payments. “A number of landlords that opted for a five-year fixed-rate five years ago will have to renew their mortgage.

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SUMMER 2023

interview ‘A good broker should never be afraid of asking the right questions’

Words by Andreea Dulgheru

Andrew Hardcastle, who leads Hallcroft Finance’s new private offering division, chats to us about the latest trends in the BTL market, the importance of getting the right people, and why the devil is in the details of complex transactions

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A

fter two decades of working in finance for several banking institutions— including Yorkshire Bank, Clydesdale Bank and Handelsbanken UK—in addition to roles at brokerages, Andrew decided it was time to take matters into his own hands and launch his own firm. At the same time, Hallcroft Finance was searching for the right person to lead a new division. A fateful conversation with his longtime friend and Hallcroft Finance’s director, Adrian Cormican, led to Andrew landing the job he was looking for. Now, he is ready to raise awareness of the company’s extensive services and support HNW and BTL clients secure the finance they need.

In his new role, Andrew will provide advice for complex deals primarily in the BTL space, including HMO and MUFB finance for individuals and limited companies. He will also advise on protection policies for individuals and businesses as part of the private offering division’s aspiration to be a one-stop-shop service.

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SUMMER 2023

“The biggest shift we’ve seen is people from the South investing up North.

They can get a better return and split the risk between more properties” 48

Why did you decide to take on your new role?

I had made up my mind to leave my previous role and set up my own business to use all the experience I had gained.

I’ve known Adrian for a number of years and had used him as a sounding board for advice throughout my career, and I talked to him about this decision. He then told me that creating this division was something he and Martyn [Pollock, director at Hallcroft Finance] were always open to, but they had never found someone they could put their trust in to be able to set this up. As we had known each other for so long and had worked together previously, he had already seen how I operated and, since I was considering leaving my previous role, I was the perfect person for the job.

At the same time, joining Hallcroft Finance was the best way to set up on my own because I wasn’t starting a brand from scratch—it offered a balance between having support from the business and the flexibility and freedom to lead in my own way. While a support network and processes are already in place, they aren’t necessarily ones that I can’t change and develop myself.

What are you looking to implement over the next 12 months?

The main priority will be the growth of the team and developing it with the right people. We don’t want to recruit anybody; they have to be the right team members who fit the company’s ethos. On top of this, we want to build our relationships and establish new ones in the three hotspots where we have offices—Leeds, London and Edinburgh. We want to raise awareness of the property finance services that Adrian and Martyn are providing, as well as tap into the BTL

market in these areas to really enhance these relationships. It’s more than client retention; it’s all about providing a full, holistic package of services. If we do the BTL and development funding as well as the business protection for a client, there’s a mutual trust between ourselves and the customer, so it makes it easier for them to do business with you.

What recent trends have you seen in the BTL market?

The biggest shift we’ve seen over the past 6–12 months is people from the South investing up North instead. We’re getting a lot of London investors looking for new investments in this region as they can get a better return and can split the risk across multiple properties. The deposit you’d need for a property in London can often get you three or four up North. However, they often don’t know the area, so this is where they would want to trust an adviser.

We’re also seeing more people come to talk to us about buying BTL properties that need improvements, refurbishing them and securing long-term debt afterwards. And there seems to be more appetite for this across lenders as well— there’s probably a bigger offering now than there’s ever been for people wanting to buy properties that need to be done up.

Apart from that, most cases that are coming across my desk from Adrian and Martyn are about the options a developer has to hold the scheme as a BTL investment. This offers some comfort that there’s an alternative exit plan for the original development finance, while also providing clients with another income stream.

Have you seen any changes in the HMO sub-sector over the past few months?

I’m not sure how it is in other regions

but, in Yorkshire, it’s a lot harder to get your HMO licence than it was five years ago, so these types of properties are being sold for a premium now by older landlords who want to get rid of the ones they own. For example, I’ve got a landlord in his 70s who wants to sell his six HMOs as he doesn’t want the hassle of managing properties, but he knows that as no one can get a licence in and around that area, HMOs have more value. There is definitely a premium for HMOs here—it’s a seller’s market.

With other local authorities looking to clamp down on the number of HMOs in their area, what impact would this have on the overall PRS? Landlords and developers are getting hit hard from every angle at the moment. I understand the desire to professionalise the industry, but you have to be careful what you wish for, as adopting a onesize-fits-all approach will be a mistake.

Existing housing stock, demographics and the pipeline of delivery across all tenures should be taken into consideration when considering HMOs, social housing, and private rental homes restrictions.

How could the specialist BTL market evolve over the next year?

Rates have risen by over 425 basis points since December 2021 and, while we all knew change was coming, many didn’t expect it to tighten so quickly. This is the backdrop the BTL sector and many others need to adapt to—and those that can find a way to adjust will be successful. The source of capital and what it costs are the most fundamental starting points; if these are not carefully managed, lenders will struggle to build a business.

Our experience has shown us that in every market there are newcomers,

whether that be vulture funds, family offices or others. I expect there will be consolidation in the industry and there will be someone that surprises us—there always is.

What is the biggest challenge for brokers when arranging finance for specialist BTL properties and for expat, foreign national and adverse credit borrowers?

It’s getting all the right information from day one about licensing, the tenancy agreements in place, and the safety tests carried out for the property etc.

The lenders will ask about them at some point and you don’t want to find anything that might cause an issue when you’re all the way down to loan completion. If I get all the information upfront, I know the deals that I give clients won’t change, and that they’re getting terms that are achievable based on their circumstances.

What quality makes a great BTL broker?

A good broker should never be afraid of asking the right questions and finding the answers they need. It’s amazing how many clients can be quite flippant with answers [about the properties they want to buy], so it’s your job to find them for the borrowers, as these could be dealbreakers. Attention to detail is also a great attribute to have.

Apart from this, it’s important to build relationships—not just with your clients, but also with multiple different lenders. There’s not much point meeting the same finance providers who offer vanilla mortgages that don’t change. You want to meet the ones that do the quirky deals for when a deal’s not quite as you’d expect it.

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SUMMER 2023

column

I Beware the legal intricacies of BTL The rules and the reality around financing BTL properties can be complex and unexpected. Consequently, buyers should never make assumptions—even when a building seems a safe bet

Words by Ana Jagota senior associate at JMW Solicitors

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nvesting in BTL properties can be lucrative for landlords and investors alike, but it comes with various legal complexities that need careful navigation. Dealing with specialist finance for holiday and short-term lets, HMOs and MUFBs, as well as working with borrowers with adverse credit, expats and foreign nationals give rise to various legal intricacies of which brokers and landlords need to be aware if the transaction process is to be smooth and successful.

Local rules on short lets When considering holiday or shortterm lets, landlords should be mindful that individual local authorities may have their own regulations governing these property uses. Some councils may require a licence, for example, while others may have a limit on the number of days the property can be let.

Landlords need to know about these before purchase and applying for BTL finance so they can undertake research into the specific local authority regulations.

Such upfront knowledge will assist them and their lawyers to comply with a specialist lender’s offer conditions so they will not be surprised by any additional costs further down the line.

The government is consulting over short-term lets and permitted development rights to address concerns in certain locations about the increase in the number of these properties. Any landlord with a portfolio of short-term or holiday lets will need to keep a close eye on the outcome of the consultation, which is due to end in June this year.

HMOs: planning and licensing In relation to HMOs, the main legal complexity that we uncover in the due diligence process is where properties are in an area where article 4 directions are in force. This is where permitted development rights have been removed so planning permission is required for valid use as a HMO—however, in many cases, this has not been secured by the current owner.

Investigating and rectifying this to ensure the property has a good and marketable title that is satisfactory to a BTL lender can cause delays and incur costs.

In certain circumstances, HMOs will be subject to licensing. This is separate from article 4 planning requirements, although they are often misunderstood as being one and the same in terms of requirements. An HMO licence does not automatically mean that a property has planning permission for this use.

When purchasing a HMO—before applying for finance—an investor should check whether the property is in an article 4 area, whether planning permission has been obtained for HMO use and, separately, whether the dwelling is appropriately licensed.

While licences are not transferrable between owners, landlords should check that the property has been properly licensed before they apply for their own, as this can help to gauge the likelihood of the property being up to the standard required for one.

In addition to planning and licensing rules, HMOs are subject to other requirements such as fire risk assessments, because there are shared areas within the property. This fire safety task should be undertaken annually and will need to be evidenced in a report. During the transaction process, it is fairly common to see that a fire risk assessment is not available or not in date, which causes unnecessary slowdowns as this has to be undertaken satisfactorily prior to the drawdown of the lender’s funds.

Tenant paperwork Additionally, for tenanted properties, it is essential to have clear, comprehensive documentation, including signed and dated tenancy or lease agreements, EPCs, tenancy deposit documents, electrical certificates (renewed every five years) and gas safety certificates (renewed every year). Having these available at the outset of the due diligence process assists with timescales and identifies any issues or gaps in documentation early on in purchase or refinance activity.

BTL Insider Magazine covered the abolition of section 21 notices in its debut Spring issue. This makes it more important for landlords to understand eviction processes as set out in section

8 of the Housing Act 1988. Evidence for the reason to evict is required, and this should be kept and compiled should it ever be needed. Good property management and administration is going to be even more important moving forward.

Individual and company borrowers Some borrowers struggle with the volume of documentation involved when dealing with a specialist mortgage— both at application stage and during the legal process. A lender’s BTL security documents for an individual should usually consist of just a mortgage offer/ facility letter and a mortgage deed (also known as a legal charge), possibly with some ancillary declarations.

For a company borrower, other documents need to be considered and executed in addition to these, such as board minutes and personal guarantees.

Each lender has different requirements with regard to these, but the majority of them require the individual providing the personal guarantee (usually the director or shareholder) to obtain independent legal advice on its contents.

It is worth being aware of this at the outset so that a separate, independent solicitor—one not instructed by the limited company—can be lined up, ready to give this advice when the time comes.

This prevents delays in returning the lender’s signed security documents, which are required prior to request of funds.

Adverse credit, expats and foreign nationals Obtaining BTL finance for borrowers who are expats, foreign nationals or have adverse credit can pose legal challenges. Lenders may have stricter lending criteria for these types of borrowers due to increased risk factors, and brokers need to be aware of these issues upfront to avoid lags and complications in the financing process.

Brokers should conduct a thorough assessment of the customer’s financial situation and credit history to identify any potential legal obstacles. They should also be well versed in the specific requirements for expats and foreign nationals, including visa status, residency permits

and credit checks in home countries.

Brokers should also work with specialist lenders that have expertise in dealing with borrowers with adverse credit, expats or foreign nationals. These finance providers may have products and guidelines tailored to such customers and can therefore provide valuable advice and guidance throughout the financing process.

Crime and money laundering Money laundering and criminal activities can pose a significant risk in BTL finance deals, particularly in cases involving expats, foreign nationals and borrowers with adverse credit. Brokers and landlords need to be vigilant and follow anti-money laundering regulations to prevent potential legal and financial repercussions.

It’s important for brokers, lenders and lawyers alike to be cautious about any red flags uncovered during the application, underwriting and legal due diligence processes, such as unusual transaction patterns, incomplete or inconsistent information, and suspicious behaviour.

Many borrowers assume that, once identity and source of funds checks have been undertaken by the broker or finance provider, this would be sufficient to satisfy the extremely high bar that is imposed on the legal profession in this regard.

This is not always the case. As the funds are passing through the solicitor’s client account, stringent and updated checks need to be undertaken. A customer can save time by being prepared with up-todate bank statements and a clear, current explanation of the source of wealth for any funds being put into a transaction.

At JMW, we deal with many lenders and brokers in the specialist finance space, and most on a repeat basis. It is always helpful when a good broker who understands the industry and the complexities and pressure that comes with it has advised the borrower at the outset with an outline of the process, the likely requirements of a specialist lender, and the legal due diligence procedure. This means borrowers are prepared and can front load as much information as possible.

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spotlight Medianett Publishing started off 2023 with a bang, with the launch of our new BTL Insider website and quarterly magazine. We welcomed the crème de la crème of the industry to party with us; over 100 of the most influential BTL finance experts celebrated the new publication over cocktails and canapes at a gorgeous rooftop venue in Shoreditch, London. Special thanks go to our generous BTL Insider Launch Party sponsor OSB Group, and group managing director of mortgages and savings Jon Hall, who discussed the opportunities of the market

Photography by Alexander Chai

“The launch of BTL Insider is particularly timely given the challenges and opportunities currently faced by the sector. It is more important than ever that those who work in this market have access to a balanced view”

“BTL is a vital cornerstone of the UK mortgage market, and there has long been a gap for a specialised, broker-facing publication dedicated specifically to covering this key area”

Jon Hall, group managing director of mortgages and savings at OSB Group

10th Nov 2023 I 9:30-16:30 I Olympia London

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Contact Megan Goncalves for more info: megan@medianett.co.uk

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