At the start of last year, the CML predicted that the buy-to-let sector would generate £11bn of mortgage lending in 2011. The actual figure is more likely to come in at around £13bn, which will account for nearly 10% of the overall mortgage lending market.

Although the CML is not due to release any buy-to-let lending predictions for 2012 until February, we anticipate that the figure could reach up to £16bn. If the CML’s overall lending prediction of £133bn for next year remains stable, this means that buy to let will account for around 12% of the total pot.

The reasons for the continued increase in buy-to-let business are numerous and include:

• An increase in the number of lenders entering the sector, which has pushed up product availability

• The inability/reluctance of first-time buyer to secure a mortgage

• Workforce mobility and job concerns

• Let to buy for second- and third-time movers

• Reduction in social housing activity from both housing associations and local councils

• Property as an asset class viewed as a safe haven for investors in uncertain times

• Rental demand continuing to outstrip supply

The majority of this business will focus on vanilla transactions, which currently make up around 80% of the buy-to-let sector.

Currently, there are 25 high street and specialist lenders operating in this space offering an increasing number of off-the-shelf buy-to-let products.

Sponsored

Aldermore Insights with Jon Cooper: Edition 9 – Why lending strategy is becoming more central in buy to let

Sponsored by Aldermore

The leading players continue to be The Mortgage Works (TMW) and BM Solutions, but recently Abbey for Intermediaries also entered the fray, albeit with some fairly lacklustre products. It remains to be seen whether it will become a serious contender.

As James Chidgey, senior manager at TMW, said recently: “We think there is potential for this sector to grow to £20bn-plus by 2015. But I don’t mind admitting that we could do with another major lender in the buy-to-let space if the sector is to grow.”

In December 2011, our data showed that there was an average of 413 products available. Obviously, the actual number of products fluctuates as products are withdrawn and introduced, but this figure rose to 517 in October 2011.

Most lenders in the vanilla space are offering products up to 75% LTV. Whilst there is one lender offering 85% LTV and four with 80% products, we expect more lenders to extend their maximum LTVs to 80% in 2012.

Residential properties and investors that do not meet standard buy-to-let lending criteria fall outside of the vanilla product range and are classed as complex buy to let.

These include:

• Houses Multiple Occupation (HMO)

• Multi-unit free hold blocks (usually blocks of flats owned under a single freehold title)

• Semi-commercial properties

• Flats above shops

• Properties with unusual tenants

• Properties purchased by limited companies

• Investors with larger property portfolios (10+)

Compared to the vanilla sector, the complex buy-to-let space is not quite so well served and the number of lenders is restricted to a few specialists, principally Aldermore, Paragon, Shawbrook and KRBS.

Access to these lenders is via limited distribution panels, so investors must go to either one of the lender’s specially selected intermediaries or a broker that can deal with the intermediary on their behalf.

As the name suggests, mortgages for complex buy to let are more intricate, tend to be bespoke in nature and lending criteria is stricter.

In general, lenders require that investors have previous experience as a landlord, although not necessarily in the complex arena. They also insist that licences for HMOs are already in place.

Rent to interest cover is more stringent, but as yields tend to be higher this is not normally an issue. Additionally, lenders like to see a detailed valuation report and are likely to instruct valuers with more commercial property experience.

This year, we expect lenders operating in the complex buy-to-let sector to increase their margins, because of the increased cost of funds. However, by Q2, these margins will probably be reduced somewhat in order that missed targets can be rectified.

Currently, maximum LTVs are sitting at around 75%, but we could see this rise to 80% towards the end of 2012.

One or two lenders may enter the complex space in Q2, but their impact in the coming year will be limited. Any new entrants will be gladly welcomed by professional landlords who have experienced a parched landscape in recent years.

Brokers looking to break into the complex residential investment arena need to take the time to research the market.

Many will have seen customers with bank borrowings from Irish lenders and, closer to home, RBS/NatWest coming under pressure to refinance away as these institutions struggle to reshape their balance sheets.

This pressure will increase in the coming months, as bank liquidity is squeezed further.

Often the banks target borrowers with strong credit profiles and good property assets. This will be a big opportunity for brokers in 2012 and those who are not confident in this space should align themselves with a specialist intermediary that has access to the niche lenders that can absorb these transactions.