Mainstream lenders should be careful entering complex BTL market – Cleary

by: Alan Cleary, group managing director of mortgages at OneSavings Bank
  • 03/03/2020
  • 0
Mainstream lenders should be careful entering complex BTL market – Cleary
It does not come as any surprise to me that major high street lenders are looking at broadening their buy-to-let offerings to include complex, limited company and HMOs.


Of course, mainstream lenders are looking at complex buy to let.

The mortgage market has seen some very fundamental shifts over the past few years and all lenders are looking at new areas of the sector that are opening up.

Low interest rates have characterised the market for a decade, and it has put pressure on pricing and profit margins. Some have withdrawn from lending altogether, citing this margin creep as their reason.

Others have made a conscious decision not to compete aggressively for new business, focusing instead on retention.

A third strategy is to specialise in higher margin business, complex buy to let, niche residential and short-term finance.

This has always been our approach, however when we launched back in 2010, we were not driven by the price pressure that is behind today’s push towards specialist finance.

Then, pricing was much higher, margins were better on residential and George Osborne’s buy-to-let tax changes were not even on the horizon.

We chose to specialise in helping borrowers who had been left underserved by the high street.

I can well understand why the high street, struggling to meet targets with a limited range of vanilla buy to let and dwindling demand for it from landlords, would be reviewing their approach.

But I’d sound a note of caution. There’s a reason that complex buy to let is called complex – underwriting this sort of business takes experience and understanding of both the borrower and the security.


HMO specifics

Take houses in multiple occupation (HMO) for example. Landlords who remain in the market today are more professional and tend to operate larger portfolios; they run them as a business.

Rather than being driven by income as many of the retired landlords using property in place of a pension, this type of investor is motivated by profit and the margins available on HMOs far outstrip those on single lets for properties of the same size.

Managing these properties is more complicated, however.

There are multiple contracts with tenants, tenant turnover can be higher though 100 per cent voids are unusual, and there is considerably more regulation to comply with.

Licensing is also compulsory for many HMOs, with the rules varying in different local authorities.


Next golden goose

There is no doubt that one of the consequences of phasing down tax relief on buy to let mortgage interest has been to shake up the complex buy to let sector.

Borrower demand is there and lenders are responding to that by innovating to offer a diverse range of buy-to-let finance that caters to that demand effectively.

This is a positive for the market – it is driving professionalism among landlords and for the vast majority of tenants, the quality of rented accommodation is also improving as a result.

But as with any quick shift in market dynamics, the industry needs to be mindful of marking out any one sector as the next golden goose.

When money rushes into a sector, competition intensifies.

That drives keener pricing and more innovation, both of which I am very supportive of and which benefit brokers and borrowers alike. There is scope though for unforeseen risks to emerge too.


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