Broker Guide: Securing buy-to-let finance

Broker Guide: Securing buy-to-let finance


Buy-to-let finance has been getting media coverage recently after reports of an increase in lending to people who are looking to become landlords and the fact that the average price of rent has risen steadily over the last six months.

One report, from LSL Property Services, claimed that the average monthly rent was £26 higher than last year, with the average London rent now going up to £1009 per month. Some have even been calling it boom time for the buy-to-let market.

It has also been suggested that high net worth individuals are scouring the market in repossessed housing. This has been said to be due to the rise in rent prices and the growing difficulty people are having in securing mortgages and so have no choice but to rent.

Terry Markham, Director at The Funding Operation, has seen some success in this area: “The vast majority of our business is in the buy to let sector. We have seen a vastly increased thirst for this type of lending this year.”

Lucy Barrett, Director at Vantage Finance, concurred: “We have noticed an upward trend in property investment, not a significant jump but definitely a steady increase.”

Rob Derry, Managing Director at Brunel Mortgages and Loans, has seen an increase in interest from landlords but is doubtful if this enthusiasm is being matched by lenders: “We are seeing an increase as some landlords wish to take advantage of lower house prices and increasing rental yields. Lenders have yet to respond to this with more products and better criteria.”

Not everyone agrees, however. This stance has been contradicted on certain fronts by some lenders and packagers. Duncan Kreeger, Chairman of West One Loans, says buy-to-let business is on the up: “We’ve written 25% more BTL business in the last quarter, than we did the year before.

“That’s not surprising. Rents have risen for six consecutive months according to the LSL Buy-to-Let index. Average rents now stand at £705 per calendar month. The rises reflect an increase in tenant demand. Landlords have been acting and expanding their portfolios. That’s translated into a subsequent need for bridging finance.”

Rob Jupp, Managing Director of Brighstar Financial Limited, has noticed nothing out of the ordinary: “We have experienced a decent volume of buy-to-let enquiries since we launched in January but haven’t noticed any significant spikes.”

The range of differing opinions proves that this particular type of finance is not very easy to come by and there are certain factors that lenders will always be looking for.

Lucy Barrett said: “It’s important that intermediaries keep their market knowledge fully up to date, or engage the services of a distributor who does have specialist knowledge in this area because the buy-to-let sector can be tricky to navigate for the more complex scenarios.”

Rob Derry believes a good track record is key: “Lenders are keen to lend to experienced landlords who are not over-geared. Landlords who borrowed up to 85 percent LTV across a large portfolio in the last decade are going to find it difficult to borrow - mainly because their portfolio will have devalued.

“Lenders want to see borrowers putting their own money in and they have a preference for quality properties that rent well and will also sell well. In terms of capital raising, lenders want to see experience, a plausible use for the money and borrowers operating within their limits.”

Terry Markham also believes knowledge is the key: “The brokers need to know their product knowledge in order to obtain the best long term deal for their customer. This is important as many lenders now have criteria based both on the rental value of the security and earned income.”

Rob Jupp is another who sees experience as essential: “I think brokers that have experience in wealth management do particularly well with buy-to-let as they target and access clients with more disposable income. Any affinity groups, including estate agents, property clubs and networking groups can provide a ‘rich vein’ of opportunity if worked well.”

Gavin Diamond, Finance Director of Cheval Bridging Finance, feels that a solid exit is important: “In order to secure bridging finance for BTL properties, the bridging lender needs to be presented with a plausible exit from the bridging loan. If the takeout is a refinance, the bridging lender will need to be comfortable that the refinance can be obtained within the term of the bridging loan.”

Duncan Kreeger commented: “It's essential brokers provide us with as much information as we need and, given the nature of bridging, often within very quick timeframes. We want to know about the experience and quality of the borrower.

“We will want to see where the money for a purchase is going to come from. And while our decisions do not hinge on computer-generated credit scores and inflexible criteria, we’ll want to look far more closely at a borrower's circumstances.”

It’s also important to realise the pitfalls that are attached to buy-to-let finance. Duncan Kreeger continued: “Any borrower looking to invest in buy-to-let must look at both price and likely rents before buying a property. It’s no good focusing on one side of the equation if you are going to ignore the overall yield. You have to do your homework.”

Rob Jupp felt that patience is needed: “Understand where deposits are coming from, ensure that values are fair and ensure that clients understand that property is very rarely a get rich quick solution.”

Terry Markham said: ”Headline rates are particularly attractive at the moment. Tracker rates are particularly low; however, the sting in the tale is generally with the lenders arrangement fee, which can be as high as 3.5 percent of the loan amount.”

Lucy Barrett continued: “Other than the obvious careful review of criteria and pricing, it’s important to consider the security carefully, i.e. location and standard of the property, is it fit for being rented out immediately? Could the valuation highlight work required to the property which might put a lender off etc.?”

Rob Derry feels realisation of value is essential: “If you don't have the cash to put in, you're not going to get a loan in the majority of cases.

“Many borrowers and brokers still want to borrow against what they perceive to be a "real" value. There is no such thing as a bargain in property terms. If the vendor says it is worth £150,000 but you can have it for £120,000 then the value is £120,000.

“Some lenders will be more flexible on property type, applicant background and many other factors. Borrowers and brokers need to understand that there is a premium in this sort of borrowing. Premium rates for non-standard applications are no longer available.”

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