Buy-to-let is a serious business, it needs to be treated like one.
That’s a contentious statement I know, but it needs to be said. I’ll explain why.
A clear line has been drawn by the regulator and the government, and as such the complexity of the business of buy-to-let (BTL) has increased exponentially. It is no longer something that can be seen as an alternative asset class. From a moral standpoint I fully support this, even if it has created a much tougher environment for my business, and those of my property investor clients, to operate in.
After all, being responsible for the housing of others is not something that should be undertaken lightly. It’s not a fire-and-forget financial instrument, but an ongoing commitment. There’s reason to believe that BTL investors need to instead think like small business owners, and there is no place for the “dinner-party landlords” anymore.
Likewise for brokers, buy-to-let is no longer something you can advise on without an in-depth knowledge of the market. Just because it’s not regulated does not mean it’s an add-on product you can figure out as and when an enquiry comes along.
We now need to think differently about buy-to-let as a whole.
Where is this coming from?
I decided to write this piece in response to this article by finance and insurance advisor Chris Hall. In the post, Chris voices his frustration at the number of cases he gets where the previous broker has floundered.
The reason is very simple. The landscape changed almost overnight.
Buy-to-let was always known as the more straightforward cousin of residential enquiries. If a broker did residential mortgages they probably did a few buy-to-lets too. They were often easier, but paid less and were therefore never something they would seek as a primary form of income. If it was an expat or a commercial deal, they would rightly advise the client to seek a specialist, as it’s just not worth their time to try to understand such niche markets.
However, it is also no longer as simple as it was to arrange buy-to-let mortgages, and a standard broker who does perhaps one BTL query a month will not have the knowledge or experience to navigate them in all their recent complexity.
These brokers may need to admit to themselves that they no longer have the experience to advise clients properly, and stop trying to occasionally ‘dip a toe’ into the buy-to-let market if their understanding isn’t strong.
Just because the industry is unregulated does mean it’s OK to waste a client’s time and money recommending lenders that are simply not a good fit. The £1,995 cited in Chris Hall’s article, charged to a client but that ultimately delivered nothing but wasted time, is a scandal. That the client didn’t even walk away with a deep understanding of the situation is amazing. For almost £2,000 I would want to be educated!
Get ready to be innovative
Customers too need to understand that the landscape has changed significantly – and how this changes their role in the buy-to-let process. To be successful in the challenging BTL market you need to be innovative. For example, it’s no longer good enough to simply buy a three-bedroom semi in the suburbs and sit back and watch its value soar. If the property is in an area of high inflation, it’s likely that the value has far exceeded the point at which a 75% buy-to-let mortgage works on a typical Interest Cover Ratio (ICR).
To add to this, rents are not rising anywhere near as fast as values are in the South East, and it will continue to be a difficult place to acquire property without significant amounts of cash. At the lower end of the market, building a large buy-to-let portfolio will take longer and most lenders have minimum property values that don’t always fit with the stock available – and a reluctance to take on many properties. Whilst yields might be good, more often than not property inflation remains stagnant in these areas.
Renovating property, looking at HMOs, or exploring other innovative areas of the market is crucial. However, the riskier the proposition, the harder it is to source funding, not just now but throughout the life of the property.
Both approaches require input from specialist lenders who are free from some of the various shackles of the regulator, and are able to complete where traditional banks cannot. These lenders are more expensive of course, but they are taking on more risk for you. (You can’t have your cake and eat it I’m afraid!)
What’s stopping us?
Part of the problem is that we, as brokers, have become accustomed recently to selling entirely on the best price. This has been partially driven by the FCA, which has an expectation that the cheapest mortgage that fits the bill will be sold.
The BTL market is very different to residential though. Buy-to-let is far more criteria-driven and some new lenders can be so slow that the time it takes to get a mortgage can stop a deal dead in its tracks. That’s an important consideration.
Low rates have driven the BTL market in the early years, but that chapter is coming to a close. Clients of mine frequently look at best buy tables and ask why I’m not recommending cheap high street bank rates that they have seen in the newspapers or on Money Supermarket.
Whilst in the past I’ve been very focussed on finding the cheapest deal for my customers, it’s no longer my primary concern. Now what I care about is the lender’s appetite. The aim is to get it done right first time, not the second or the third.
Under new regulations, lenders take a much more holistic approach to underwriting, and not just in buy-to-let deals. It’s no longer just a box-ticking exercise; they are more likely to sit back and think about whether the deal makes sense to them, and if it’s close to the limits they might decline. Understanding their appetite for certain client profiles and deals is crucial to understanding exactly who to put a deal to – and how successful that might be.
Next steps for buy-to-let
If you are considering getting involved in buy-to-let, think hard about the realities. It’s tough these days. Assemble your team: find your accountant, your broker and your conveyancer, and listen to what they have to say. They have had hundreds of clients before you, and experiences that you can draw knowledge from.
Choose professionals that want to educate you, and are prepared to tell you if something is a terrible idea and should be avoided. Pick experts that have the confidence to charge on success, and the confidence to charge well. In this instance, the internet isn’t your friend – the advice you find online from people with zero accountability is worth exactly what you paid for it… You get what you pay for, and you don’t know what you don’t know.
Brokers, you probably wouldn’t think twice about referring out commercial or expat business because it’s a very different beast to regular mortgages. Well, the same now applies to buy-to-let.
In response to and as a result of an increase in BTL enquiries, we have formalised a referral scheme to allow you to hand off complex buy-to-let cases in return for a 50% split on the procuration fee. Click here to make an enquiry today.