Buy to Let Mortgage Underwriting for Grown Ups
David Lawrenson of private rented sector consultancy LettingFocus.com explains how traditional mortgage lenders need to up their game to avoid losing large chunks of the buy to let loan market to new entrants.
How is this for a nice position to be in? You own 20 properties that you let out. Add up their value and they are worth £3m together. You have £1m of buy to let type mortgages on these properties – so that’s a loan to value ratio of just 33% and a net equity of £2m.
The mortgages were all arranged ages ago (six of the properties are on the same mortgages you arranged over twenty years ago) and you were sharp enough back then to opt for mortgages that track the Bank of England’s base rate. Your average loan interest is 1.75% above base rate, giving a current pay rate of 2.25%.
Rents have increased nicely in the areas where the properties are – and your net profit after all running costs and the mortgages is now over £120,000 a year.
Your tenants stay for ages and they like you as a landlord. In fact none has left for over a year. Life looks good. Sure, occasionally you will read an article online in the papers and be amazed at the hatred and vitriol that the readers’ comments section always contains against landlords. But you have a thick skin – so this does not really bother you. (This is not me, by the way, this is a client of mine who is typical of many of the wealthier successful landlords and property investors that I see and advise).
And so you would like to continue to develop your business further and add more properties.
But you find that most buy to let mortgage lenders do not want to know you – even though you only want 30% loan to value on the next property you are buying.
Apparently, in their eyes you are “too high a risk”, despite your years of experience, the fact that you have never missed a mortgage or other payment and the massive equity in your houses plus the huge rental roll.
Indeed, you are constantly amazed to find that lots of these lenders will only lend to landlords who have up to three properties in their portfolio and many more draw the limit at 10. Others have minimum non-rental income requirements.
These lenders would rather lend their cash to totally new and “green” landlords who want to borrow up to 80% loan to value.
Buy to Let Underwriting
We see this kind of thing lots of the time and it really shows that most mortgage lenders in the buy to let space do not seem to understand their market nor the risks of the loans they are underwriting. They do not do buy to let underwriting like grown ups!
In the market for buy to let loans it often falls to the more specialists niche lenders like Paragon and CHL to make hay from the huge profitability of landlords like the one I have described.
But these smaller lenders and others like them have often been restricted by the amount of capital they can access. As they are not big building societies or banks they historically did not always have huge access to wholesale funds and cannot draw on retail deposits from a branch network. And so what they tend to do is focus their lending on the really profitable niche areas like lending for houses in multiple occupation or properties in need of major refurbs. You cannot blame them – their strategy is about maximising their profits in the niches where the profits are greatest.
But there remains a huge gap in the market for a mainstream viagra generic online lender – a large bank or building society perhaps- to wise up and lend to the wealthy landlords who would like to buy more “bread and butter” properties.
This would, of course, require a more sensible and grown up approach to underwriting. Unfortunately, too many of these banks and building societies are still stuck in a “computer says no” mentality and their executives still do not seem to understand the potential profits to be gobbled up. (We suggest that experienced landlords usually charge a little less than market rent, but have tenants who are happier and stay longer and thus the landlords suffer less time when their properties are empty).
Buy to Let New Entrants
The likes of the institutional investors (pensions funds like Aviva, overseas investors like the Qatari Diar funds, merchant banks like M3 Capital) and now, even peer-to-peer lenders can all see the potential of residential renting and are entering the space that the mortgage lenders seem unwilling to capitalise on. Some of these new entrants have been advised by us.
It is time for more grown up mortgage lending from the UK’s lenders.
Lending money to experienced landlords who are actually really low risk cases would be a start. Other opportunities exist – for example around faster lending to people who buying at auction (a part of the market where bridging loan providers flourish partly because traditional mortgage lenders are just too slow). But there are so many other opportunities and un-served sectors that exist.
It is time the bulk of the UK’s big mortgage lenders upped their game – or risk losing huge chunks of their market to interlopers.
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David Lawrenson, founder of LettingFocus also writes for property portals, speaks at property events and is regularly quoted by the media.
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