Keeping it simple A quick look at Wikipedia reveals that the ‘KISS principle’ – in other words, ‘Keep it simple, stupid’ – was actually coined by a U.S Navy aircraft engineer back in the 1960s, although it wasn’t truly popularised until the 1970s, and perhaps didn’t truly enter the business lexicon until slightly later. The principle seems fairly obvious but, for those prone to embellishment or over-complication, it effectively means that ‘most systems work best if they are kept simple rather than made complicated’. I think there’s a lot to be said for this, especially in our mortgage world which can tend to be rather tricksy about what is, at its heart, a very simple business. My own ethos about lending tends to be just as basic – ‘Only lend to people who can afford to pay it back.’ And, in my view, if you’re starting from this perspective, and operating your lending business along these principles, then you probably won’t do too badly. Unfortunately, and in rather spectacular ways, some lenders lost sight of this in a rather big way back in those pre-Credit Crunch days, and the history books will tell you everything you need to know about how that panned out. Having ‘KISS’ at the front of your mind seems like a good strategy to pursue in both mortgage lending and mortgage advice at the moment, especially given the focus on complexity within specialist lending. Confusion seems to abound in a number of key buy-to-let areas and that, to my mind, is a result of certain lenders over-egging the proverbial lending pudding. I read a piece recently about buyto-let lenders’ stress tests with a number of advisers suggesting they (and clients) were getting confused about how the rules were being followed, what that meant for stress tests, and where it might lead the landlord client. The argument being that landlords were having to take out five-year products because the
chief executive officer, Fleet Mortgages
stress testing in place was forcing them down that route in order that they could meet the rental criteria requirements. From Fleet’s point of view, we tend to focus on a simple stress-test of 125% at 5.5% across the board, although I appreciate that certain products might come with different formulas – for pay-rate products or HMO/MUBs, for example. But, on the whole, it’s a straight stress-test that can be applied to the vast majority of our products. Having that knowledge and certainty as an adviser in this space seems to be helpful, given the feedback that we get back. It’s certainly not our method of business to operate stress tests which ‘force’ a landlord into a 5-year deal which they are only taking in order to secure any kind of mortgage finance. That can’t be right for them and it effectively puts the adviser in an awkward position. By operating the same stress test across the vast majority of our products, we are offering a choice of two- and fiveyear options, and not setting up our lending policy so that it’s five-year or nothing. Having that simplicity does seem to be working, particularly in the growing limited company sector – just this year we’ve seen an 11% increase in limited company applications received over 2018 and it’s my belief that this is a part of the buy-to-
let market that will continue to grow. Limited company is however a different ‘beast’ to lending to individual landlords, and it’s important that all stakeholders fully understand the specific needs and requirements around that. It therefore pays to be working with a specialist lender in that regard – for instance, traditionally highstreet lenders have lent to a mixture of trading and non-trading SPV limited companies, whereas we only lend to SPV limited liability companies set up for the sole purpose of buying and renting out properties. The problem is that when you lend to a trading company with other lines of business, the transaction becomes far more complicated as that company has debtors/creditors and perhaps other credit facilities/liens over their assets. That may complicate matters a lot as it could challenge the priority of the mortgage lender’s first-charge in a default situation. Looking at the options available, and the potential for such issues to arise, we prefer to keep it simple, and would urge advisers to work with lenders who feel the same way. This is not a dumbing-down of the market situation but a focus on clarity and transparency and we think it’s an approach which will appeal to both advisers and their landlord clients. And with that, and as this is my last article before Christmas, may I wish all readers of MI a very happy holiday season and a very prosperous new year. 2020 is likely to be a very interesting one for all concerned.