Buy to Let Mortgages and the Future for Smart Lenders
For a long time, in our corporate consulting work with mortgage companies and brokers, I have advised lenders and brokers that the “one size fits all” mortgage lending approach in buy to let may be nearing the end of its shelf life.
Our work may soon start to bear fruit. Eventually, other mortgage lenders will follow and design mortgage products that meet the real needs of the modern private landlord. If they don’t they will find themselves losing profits and market share.
So, these are our predictions for the future of buy to let mortgage lending.
1. In the future, lenders will need to flex interest rates and loan to values to fully take account of the different risks and costs to the landlord of different types of property – whether it is leasehold or freehold or the size and type of property. Lenders will need to figure out the costs and risks of different property types and load that back into their mortgage offers.
2. I would expect lenders to look at the type of landlord customer seeking a buy to let loan– what’s their experience in terms of years of being a landlord, the number of properties they have, their exposure to buy to let, their total assets and liabilities, whether they self manage or use letting agents and if they use letting agents, how extensively they use them and for what services.
In other words, lenders should figure how smart their individual landlord customer is at being a landlord and then reflect that in loan offers. This requires the collection of more information as part of the application process (and possible loss of potential customers) but the extra long run profitability for the lenders could outweigh the risk of some loss of customers.
3. I would expect lenders to assess more deeply the outlook for different locations – this is influenced by population movements, demand from tenants, the risk of oversupply of particular property types, the extent of regeneration or degeneration. Lenders will have to take these things into consideration when they offer a loan. Certain locales could be “red lined.”
4. I would expect lenders to assess risks of lending in terms of the type of tenant group the landlord intends to let to – are they proposing to let to students, licensed HMOs or unlicensed HMOs, single let or multiple AST lets, LHA/Housing benefit, private sector lease schemes, corporate lets etc.
Different tenant groups have different risk, time involvement and cost profiles for landlords – profiles that experts who understand the landlord market can map out and translate into risk for the lender.
Products that offer “light refurb” as part of the offer are also required by experienced landlords.
5. I would expect lenders to look at the risk from the Private Rented Sector Initiative (PRSI), if that starts to take off. The PRSI (in which institutions invest in new build property to let) is a great idea but the building of huge new chunks of me-too identikit flats did little for apartment yields and rents in the noughties and it won’t be different this time either, if PRSI takes off.
6. There will always be a role for mortgage brokers who often have a deeper relationship with clients than that of just offering mortgages. However, I would expect the real mainstream “vanilla product” or “take it or leave it product” lenders selling to sophisticated clients, to increasingly question if they need brokers at all, to ask what the broker role in new business in the future will be (possibly more complex situations only) and to even consider if they could operate fully direct. And brokers may need to prepare for this change.
7. I would expect to see more lenders at the “rougher edge” property shows – finding out the latest scams some “advisors” are up to before they come to light years later as a hit on the lenders profits.
8. I would expect lenders to look again at whether they could more often act as receivers of rent in cases where it’s clear the tenant is paying rent regularly. Why seek repossession and evict paying tenants, when the option could be to sell a property with rent paying tenants to other landlords as a going concern?
9. I would expect lenders to improve times taken to “turn round” buy to let mortgage applications. When the economy settles, faster turn round times could open up the auction market to people seeking mortgage finance, which at present is mainly the province of cash buyers and bridging loan providers.
10. I would expect all lenders to ensure landlords mortgage statement are “written up to” end of the tax year, not to other dates, because end-of-tax-year-statementing is what private landlords want. Doing otherwise is simply very poor customer service, apart from being plain annoying for private landlords.
11. I would expect mortgage lenders to become real one stop shops from where landlords can buy rent guarantee insurance, landlord building insurance and possibly also EPCs, tenancy deposit insurance, arrange independent inventories, gas inspections, electrical inspections, tenant referencing services and up to date tenancy agreements.
12. I would expect mortgage lenders to provide information to their landlord customers about how to be successful landlords, including simple easy to use guides and not leave them in the hands of letting agents, who are often very good but who can sometimes be shockingly bad. I would expect lenders to develop their site as a trusted place for news on the landlord market.
Some of these ideas require thinking through in terms of how they could be processed on a practical basis at each lender. Others are easier to implement.
But what’s clear is that the market is changing. The opportunities are there for smart buy to let mortgage lenders to be smarter still and win the profitable business of the smart landlords.
MORE ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector Expertise and expertise and I’m David Lawrenson, a landlord and property investor myself for over 25 years and best known as the author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 26,000 copies sold (up to Feb 2011).
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