Broker Guide: The year ahead for BTL

Broker Guide: The year ahead for BTL




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Buy-to-let (BTL) is on everybody’s lips at the moment as the demand for it is booming and some are predicting a boom. Bridging & Commercial wanted to look at the current BTL climate, find out what the FSA’s proposals of regulating BTL are, as stated in the latest MMR consultation paper, and what some within the industry think of the proposals.

With the housing supply shortage, a lack of first-time buyers and the combination of tighter credit conditions and stricter mortgage product criteria the demand in the Private Rented Sector has seen a huge boom. This has therefore seen a growth in BTLs, which has been met with much interest from landlords and investors alike who want to capitalise on the opportunities of the practice and see it as an investment opportunity that should remain quite attractive in the long-term.

Buy-to-let bridging

BTL relates to the practice of buying a property to let to tenants rather than to live in. BTL loans are currently unregulated and a client can secure one by way of a first or second charge on their BTL property, irrespective of the purpose or whether they are High Net Worth.

Many turn to a specialist bridging lender for short-term finance as most high street lenders will not provide BTL mortgages until the property has been owned for at least six months. So many who buy a property to let out immediately utilise a BTL bridging loan and when the six months is up they should be able to attain a conventional mortgage.

Some high street lenders will only provide a BTL mortgage if the net rentals covers 125 per cent of the interest payments. One may not be able to guarantee this for a new property but use a bridging BTL loan to wait until the rent is high enough, at which point they look at refinancing.

Many will not lend on unoccupied rental properties or properties that require renovation work prior to being put on the rental market. This means that if your client wants to buy a property for the purpose of letting it out, and has been unoccupied, they will have to occupy it themselves for a certain period of time.

Some bridging lenders not only finance the purchasing price of the BTL property, but can also lend a proportion of the refurbishment costs. Once renovated and let out, you should be able to obtain a long-term mortgage to replace the bridging loan.

If one buys a BTL mortgage at auction then it is quite typical that a 10 per cent deposit is payable on the day to secure the purchase, with the balance of the cost being payable within 28 days. This therefore, is another example where many turn to bridging finance.

A bridging BTL loan is secured on some property, whether that’s a main residence, a second home or other item that has sufficient equity in.

2012

BTL this year could prove lucrative, with tenant demand set to continue increasing throughout 2012, according to Paragon Mortgages.

Two weeks ago, a poll published by the specialist BTL lender found that 56 per cent of landlords expect their tenant demand to grow in 2012 compared to 45 per cent who felt likewise at the beginning of 2011.

Nigel Terrington, Chief Executive at the Paragon Group, commented: "2011 was certainly a good year for the buy-to-let market, with not only increasing tenant demand but landlords investing in their portfolios, low levels of arrears and more available finance.”

Paragon Mortgages also recently published the results of a poll which surveyed brokers on the prediction of the buy-to-let market in 2012.

53 per cent of brokers surveyed are predicting an increase in their BTL business in 2012 and of that 53 per cent, 19 per cent are expecting an increase in business of 10 per cent or more. Only 3 per cent are expecting to do less BTL business this year.

John Heron, Managing Director of Paragon Mortgages, said: “2012 is set to be another challenging year for the buy-to-let and general mortgage market as we continue to feel the impact of the Eurozone crisis and wider economic factors.

“However, it’s positive to see the level of optimism among intermediaries and the fact that more than half expect to increase their level of buy-to-let business throughout the course of the year.”

Lenders also appear to be confident in the BTL market. Many have launched new loans and products, cutting their rates, expanding where they lent to and also decreasing their respective minimum property values, applicant age and income requirements.

Regulation should help to filter out unscrupulous mortgage advisers, which will be positive for the sector, particularly for inexperienced landlords. However, the more experienced property investors are concerned that regulation would lumber the private rental sector with unnecessary burdens.

BTL in 2012: increased tenant demand, increased investors/landlords moving into BTL due to its lucrative nature and wanting to expand their property portfolios.

MMR proposals

The most important part of the FSA's MMR paper published in December was: “We are currently seeing anecdotal evidence of buy-to-let mortgages being used by borrowers who would otherwise be denied an owner-occupied mortgage. We remain concerned that this problem may be exacerbated with the implementation of our responsible lending proposals. Whether we regulate buy-to-let lending is a decision for the government.”

It also disclosed that the MMR may affect the BTL market as fewer consumers entering the housing market will increase demand in the rental market, thus making BTL investments more attractive as a result of the increased rental yield. On the other hand, lower expected capital gains from reduced house price growth will lower incentives for BTL investors to enter the market, possibly implying a further increase in rental yields to clear the market. Impacts on the BTL market may in turn have further impacts on house price growth.

 

 

 

 

The MMR also said that reduced lending, due to the responsible lending requirements, may also have indirect impacts on households from changes in house and rent prices.

 

 

 

 

It may push households into renting; the increased demand for rental properties may lead to increased rental prices. Increased demand for rental properties makes BTL investments more attractive, potentially leading to increased rental supply. The overall impact on rental prices is therefore unclear.

 

 

 

 

It may reduce the demand for houses; the growth of house prices will be lower. Overall, despite the possible increase in the attractiveness of BTL investments, but the FSA expect demand to purchase housing to fall. This is because some people refused a mortgage as a result of the MMR will continue to share accommodation, for example with parents. Thus the average household size will increase under the MMR. Lower house price growth is beneficial for first-time buyers and those borrowers who do want to move up the housing ladder. Borrowers who already have significant housing equity will lose from the reduction in house price growth.

 

 

 

 

The overall effect on BTL investors is unclear. BTL investment is less attractive due to reduced house price growth. On the other hand, it may be more attractive, if rental yields increase.

 

 

 

Some non-bank mortgage lenders will not be affected by the MMR proposals as they are not regulated by the FSA, for example firms engaged in BTL lending

 

 

 

Industry responses to the proposed reforms of BTL

 

 

 

 

Stewart Barnes, Director at Portman Finance, stated that the BTL market has almost become self-regulated and that lenders are now very cautious, “having introduced a number of restrictions in their product range and some have withdrawn completely from the market.

“What must also be carefully considered is the impact of draconian regulation. At the present time with residential mortgages proving challenging, in particular for first time buyers, the rental market is incredibly important to providing housing stock. If it is made too hard for landlords to renew their BTL mortgage or invest in new BTL properties then we will have a plethora of properties being brought to the market at a time when mortgages are in short supply. This would also result in a shortage of private rental accommodation.

“The BTL market was originally dominated by Professional Landlords, who would be deemed as experienced investors and understood the risks of a BTL mortgage and this market operated well. What we saw with the property boom was the barriers to entry being dramatically lowered and general consumers jumping on the band wagon without fully understanding the risks. It is because of this greed and ignorance, rather than poor lending practice that the professional and prudent landlords could potentially suffer now – long after the horse has disappeared over the hill.”

Bob Sturges, Head of Communications at Omni Capital, believes: “Along with bridging, buy-to-let has provided one of the few bright glimmers in the recent period of unremitting lending gloom. The two sectors are also closely linked by the exit strategies provided by BTL. The question of impending regulation is therefore of pertinent interest to players in both.

“The case for regulating BTL products in the same way as residential first mortgages is, I think, less clear-cut than that for regulating other products, such as second charge loans. Most BTL loans aren’t secured on the borrower’s main residence. BTL is generally viewed as a business investment opportunity. LTVs are generally lower. The incidence of arrears and repossession are relatively low. Tenants enjoy protection under existing laws. And over recent years, borrowers have become more savvy and lenders more prudent. All these and other factors combine to mitigate the risk of B2L, both to providers and consumers, so why the need to regulate?”

James Bloom, CEO of Regentsmead, told B&C: “Clearly the positives are the additional protection, which will be offered for landlords and tenants alike such as access to the financial ombudsman and FSA. However as with all regulation it will be cumbersome and heavy handed inevitably leading to higher costs. I believe that light touch regulation is the way to go but no doubt this will not be the case!

“In terms of the bridging sector regulation will clearly make it slower and more difficult to get a buy-to-let mortgage which will impact on a bridger’s ability to ensure an exit in a satisfactory period of time as it will for a development lender whose exit is a BTL mortgage. This will be particularly hard for those lenders who have credit lines which are inflexible and require repayment at fixed periods.”

Speaking on the need to regulate Bob said: “To begin with, it is not yet certain that BTL will be regulated under the FSA (or its successor). But I wouldn’t want to bet against it. The mood is clearly for more, not less, regulation of financial products. Still smarting from the impact of the 2007/8 financial crises, both those who create the regulatory framework – Parliament and HM Government – and those who enforce the rules – the Bank of England and the regulatory authorities – are understandably determined not to repeat the mistakes of the past. Throw into the mix the very real prospect of EU intervention, and I reckon my bet is pretty safe.

“It is also a fact that the FSA’s current remit extends well beyond residential mortgages to embrace many forms of consumer investment activity. So, their thinking may go, why not add one more?

“Assuming therefore that regulation will happen in one form or another, will it be a catastrophe for the industry? I don’t believe so for a number of reasons. First, BTL is dominated by the big banks and one or two well-established, reputable niche lenders of scale. Most already offer FSA-regulated products – mortgages, insurance etc. – and have well-resourced infrastructures, including legal and compliance functions, designed specifically for operations in a regulated environment. Even if their BTL channels operate outside these structures – which I find hard to believe – it clearly should not be difficult, or costly, to blend them in.

“Second, I would guess that most intermediaries offering B2L products also offer other FSA-regulated products. Their transition to regulation should therefore be equally straightforward. For those who don’t, I’m afraid it’s a case of having to adjust to the new market realities, like it or not.

“Third, BTL is represented by some excellent trade bodies. They have a crucial role to play at this pivotal time by lobbying for proportionate, practical and sensible regulation while providing their members with valuable information, data and intelligence. I hope too that our own bridging trade bodies take this opportunity to engage to help protect the essential link between the two sectors.

“And fourth, the prospect of regulation in itself is unlikely to slow the growth of BTL. The reverse may even be true if borrowers/investors feel they have added protection and are conducting business with well-scrutinised, reputable organisations. UK demographics are also on the side of BTL; as are the risk factors that have caused the big lenders to all-but desert other lending arena.

“The regulators tell us they have learnt the lessons of the past. They acknowledge the need to balance effective consumer protection – at which no-one should baulk – while preserving product innovation, competitive pricing and a generally beneficial market dynamic. If they can achieve this for B2L, I see no reason to be fearful of a regulated future.”

 

The BTL market is set to boom this year with the increase in tenant demand and investor interest in the private rented sector. At present the vast majority of buy-to-let business is unregulated. Some people in the industry think that BTL should not be regulated with many believing the triggers for protection are not around the BTL mortgage product but in terms of advice about whether to purchase a home, to buy in a certain region, target a certain renter, etc. Understanding this potential misunderstanding should be crucial to any decision to regulate by the FSA.

By Jason McGee-Abe

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