TSLE: Specialist BTL market needs to offer product transfers – Riches

Speaking at The Specialist Lending Event in Birmingham, Phil Riches (pictured), sales and marketing director at Keystone Property Finance, said that in 2023, there would be around £30bn to £35bn worth of buy-to-let mortgages that need to be remortgaged.

“People ask how are they going to remortgage…the answer is: look, talk and discuss with the lenders and then decide what they should be doing. But there’s going to be a lot of business out there, so this isn’t a boom-and-bust basis, it’s a case of there is business to be done.”

He continued that the “lifeblood” for brokers was the clients in their back book, so product transfers were an important aspect of their businesses.

However, Riches acknowledged that product transfers in some parts of the specialist market were more challenging as their securitisation or money market funding does not easily allow for product transfers.

Riches said that Keystone had gone to its funder and “solved the securitisation model for product transfers” so it “could do it”.

“A lot of lenders in the market still cannot do it. That’s not a fault of theirs. It’s a decision that we took…and said we are going to do it full stop. To that extent, it has gained us business from products that we’ve had in our portfolio for two years, where we’ve gone to the clients and asked ‘do you want to PT?’. They’ve said ‘yes’.”

“That’s where the market needs to go to, because it does provide security and it does provide longevity of lending and having worked for a number of lenders in the past the one thing that is the most costly it is to get business through the door.”

PRA rules do allow for ‘like-for-like remortgage’

Brokers at the event said that heightened Interest Coverage Ratios (ICR) and stress testing has become “really difficult” due to rising interest rates.

Regulation mandated that lenders need an ICR of 125 per cent or 145 per cent, and borrowers needed to be stress tested to ensure they could afford the mortgage if interest rates went up.

This has left some clients with limited options to remortgage or do a product transfer, brokers said.

Riches said that within the rules from the Prudential Regulatory Authority (PRA) in 2016, lenders have the ability to do a “like-for-like remortgage and to hold the stress test at or around 100 per cent of the pay rate”.

“If this if offered it could assist your clients in not becoming mortgage prisoners, but not in every case. It has to be related to the lender looking at the client, the strength of the client, the background of the client, and their capability.”

He added that this ability had “not been actively used” by lenders in the market.

“This is a rule that has been virtually not looked at or used by any lender, but it is there. So my suggestion would be talk to the lenders where they’re already based, and see whether they’re capable of doing either a product transfer, or remortgage on a like-for-like basis.

“If they’re not, then you’re going to have to start talking to the market and discuss it with the other lenders around. Some lenders will say absolutely not going to happen, but it is there [in the rules].”

Lenders pre-empting EPC legislation is a ‘dangerous game to play’

When asked whether lenders would have to mandate higher Energy Performance Certificate (EPC) ratings before the government intervenes, Riches said that this was unlikely as it was a “dangerous game to play”.

Riches said that when Minimum Energy Standards were brought in, legislation gave staggered implementation periods for new and existing tenancies and it was likely this would be similar for the Minimum Energy Performance of Buildings Bill, which is due to have its second reading in March.

The bill proposes that new tenancies should have an EPC rating of C or higher by 2025 and exiting tenancies by 2027.

Riches continued: “Will lenders come in with it locked and loaded? If they do, you’ll probably find they won’t get a lot of business because others will continue to do business in that market.”

Nick Morrey, technical director at Coreco, said that EPC legislation would impact smaller landlords “more” than more professional or portfolio landlords.

He said: “Bigger landlords with portfolioswho have already gone down the limited company route, will be used to buying and selling properties, so if they have a property, which has a poorer EPC rating they’re likely to offload it and then go and buy something that has a much better EPC rating to shore up their portfolio.”

He added that smaller landlords with one or two properties would be “likely to leave” unless “they were prepared to set up a limited company and go down the professional route”.

Morrey said that this would be an opportunity for developers to pick up lower-rated properties cheaply that may not need a huge amount of work, do them up and then “flip as fast as they can”.

The Specialist Lending Event continues this week with events in Wetherby and Bolton. If you are interested in attending follow this link. 

The views of the panel members do not necessarily reflect the views of the individual’s company.