Judging by the newspaper headlines about the slowing housing market, the government’s buy-to-let (BTL) crackdown and the demise of the amateur landlord, you’d think there couldn’t be a worse time to enter the BTL lending market. But that’s exactly what we’re doing, and with good reason.
The BTL market may not be as buoyant as it was a few years ago, but it is still a very large market and is holding up well in the face of the government’s tax and regulatory changes. When you look at the facts, there are plenty of positive signs. Last year, the average market value of BTL landlords’ properties hit a record high and landlords are benefiting from strong growth in rents in many parts of the country. On the debt side, landlords are also able to choose from the broadest range of BTL lending products seen in the market since the financial crisis; and thanks to healthy competition between lenders and continued low interest rates, they are able to take advantage of low-cost financing deals.
While many of the small, highly geared landlords are struggling and starting to leave the sector, the number of large landlords with portfolios of half-a-dozen or more properties is actually increasing. These better capitalised, more professional landlords are best placed to adapt to changes in government policy. They also continue to see property as an attractive investment, offering good levels of return in a world where interest rates are unlikely to rise significantly any time soon. The market may be tough in London and the South East, where yields are at historically low levels and it is therefore difficult to generate the income returns needed to service a higher loan-to-value (LTV) loan, but there is still money to be made from BTL property and strong demand for BTL loans across the UK.
”Specialist lenders like us are better placed to service the needs of larger, more professional landlords than the high-street lenders, which are set up to do a large volume of simple deals”
The growing importance of larger, more professional landlords in the BTL sector plays into our hands as a specialist lender. These borrowers tend to be buying through limited companies and SPVs, and have more complex borrowing requirements than smaller landlords. Specialist lenders like us are better placed to service their needs than the high-street lenders, which are set up to do a large volume of simple deals.
As an industry, we have also become increasingly competitive. The gap between the rates offered by high-street banks and specialist lenders has narrowed as the mainstream lenders have retreated and we have become more active. Our own cheapest rate on a two-year fixed-price deal is 3.39%.
Launching into the BTL market also fits in with our drive to offer property professionals a broad range of products. We are now much more than just a bridging lender. In 2017, we launched our second charge product, which has proved really successful – we have since completed more than 2,000 second charge loans. Last year, we also entered the development lending market, where we are able to offer small developers loans at up to 75% loan-to-GDV and 85% loan-to-cost.
Our expansion into these new areas of the market means we are able to offer property professionals a one-stop shop. Instead of having to switch between different lenders, they can come to us for all their borrowing needs. Being able to offer a range of different products is particularly important in today’s increasingly uncertain world. Borrowers want certainty from their financing arrangements and that can come from building relationships with a small number of lenders, rather than constantly chopping and changing. If a borrower has taken out a bridging loan with us to acquire a property, then it is far easier for us to refinance that loan than it would be to write a loan with an entirely new customer. We already know the borrower and the property and understand the business plan.
Indeed, we are already seeing some of our customers moving between products, perhaps starting out with a bridging loan and then turning to us again for a development loan. We expect it will be the same story with BTL lending. We will undoubtedly broaden our client base, but we also expect existing customers to account for a significant portion of our BTL lending. Small developers that have turned to us for bridging loans or development finance can now use us to finance their BTL property portfolios. A BTL loan can also be a good option for developers that perhaps find it hard to sell some units in a new development, and want to let them out until conditions in the for-sale market improve.
We are also seeing growing demand for bridge-to-let loans, which naturally complement BTL loans. Some landlords are struggling to achieve the returns from their BTL properties that they once did because of tax changes and new regulations. Naturally, they are therefore looking for ways to boost their returns, and refurbishing a property that is in a poor state of repair with a view to then letting it out is an increasingly popular strategy. A bridge-to-let loan can be a great way to finance such a project and at the end of the loan term, the borrower can switch to a BTL mortgage.
So despite all the well-documented challenges facing the BTL market, we see plenty of opportunities, especially for specialist lenders like us that are geared up to support larger BTL landlords and SME developers. Ultimately, we believe that for investors that are willing to take a long-term view, the future for the property sector is positive and so we are happy to be entering the BTL lending market, and to continue growing the range of lending products we offer property professionals.
West One is a leading provider of specialist finance and regulated mortgage products. Our range of services includes bridging (regulated and unregulated residential, commercial and bridge-to-let), development finance – for residential and mixed-use developments – second charge mortgages for residential and buy-to-let properties and first charge buy-to-let mortgages.
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