Brokers fear limited PT options could be ‘massive issue’ for select landlord clients – analysis

This could mean that landlords face higher remortgage rates, sit on high Standard Variable Rates (SVR) or not be able to secure a deal and exit the market completely.

Brokers said most high street lenders who offered buy-to-let mortgages could offer product transfers, but some specialist lenders are not able to offer this facility which could raise problems for borrowers coming to the end of their deal.

What is stopping the transfer?

Matthew Rowne, director of The Buy to Let Broker, explained that this was understood to be due to a number of factors.

“Within the small tranche of lenders not yet offering product transfer, some have historically presented the required system changes as the main barrier, although one would assume the cost of system restructure would, in the long term, be off-set by the considerable commercial benefits to client retention.”

He added that with some lenders it was understood to be a “funding line issue”, and as many specialist lenders are funded using capital markets this could be a factor.

Michael Webb, managing director at Mortgage Republic Limited, agreed and added: “Buy-to-let product transfers do exist in the marketplace, but not all lenders offer them, and some lenders do not offer them to every client.

“The reason behind this is usually how the mortgage was funded by the bank originally. If the bank has funded the mortgage from its own savings book, then typically they can do a product transfer.”

He said where a mortgage was funded on the commercial market then “typically a product switch is not available”.

Rowne continued that there had been a number of new lenders in the market over the last seven years, and as they did not have a back book of clients, they did not have an immediate need to offer product transfer products. He said that product transfers would usually be introduced two to seven years post-launch

What options can brokers offer?

Rowne said that there were a “few prominent lenders” in the specialist buy-to-let space who did not offer product transfers, but brokers could take clients back and apply on the standard product range, treating the application as a remortgage with full assessment, underwriting and valuation.

Webb said that brokers would be able to advise on application if a lender can currently consider product switches.

He added: “If a landlord is not offered a product switch, then, of course, the remortgage market is open to them. A good broker will be assessing both of these options for their clients anyway.”

“However, rental calculations and stress testing, as well as potential value decreases may prove challenging when remortgaging, and as such a reversion to the SVR may occur.”

What about those at the end of deals?

Some also pointed out that there is a significant cohort of borrowers coming to the end of their mortgage deals as many landlords opted for five-year fixed rates following changes made by the Prudential Regulatory Authority in 2016, which meant that lenders must use a higher interest rate and bigger cushion in assessing affordability.

Rachel Lummis, mortgage and protection adviser at Xpress Mortgages, said that this would be a “massive issue for many”.

She explained: “Right now, these clients all coming to the end of their five-year fixes which were around 3.5 per cent say, are facing rates of six per cent or seven per cent to remortgage elsewhere and lenders have increased their rental stress tests and that means that the rental calculations are not working so they can’t borrow that same amount again.

“Their only choice then is to do a product transfer, but if their lender doesn’t do product transfers, they are in trouble.”

Lummis continued that this could leave some landlords on SVRs, which she said typically stood at seven per cent, but others could be above eight per cent.

She added that many landlords would need to increase rents to meet SVR mortgage payments or they could be forced to sell up.

What are the consequences if landlords can’t transfer?

Rowne noted that the existence of a product transfer risk was “client and circumstance specific”. However, he noted that the risk of client not having a variety of options upon maturity had “increased significantly” due to the considerable increase in base rate, volatility of swap rates and consequent impact on lender pricing, Interest Coverage Ratios (ICR) and rental stress rates.

Craig Fish, founder and director at Lodestone Mortgages and Protection, said that if a landlord found themselves with a lender that wouldn’t offer them a transfer, though “highly unlikely”, then their “options could be limited”.

He continued: “Although not impossible, and likely to be very case specific, many landlords are going to suddenly find that the rental income is no longer sufficient to make the mortgage work.

“If lenders were to stop offering product transfers to landlords, I fear that there will be a mass influx of properties onto the market as landlords quit. This will have untold consequences on the housing market.”

Robert Payne, director of Langley House Mortgages, added: “Buy-to-let lenders are not regulated like residential lenders and therefore do not have to offer product transfers to their existing borrowers. Some still do but those that don’t could be leaving people in a difficult position.

“Recently, we had a client who was unable to do a product transfer and also unable to remortgage to a new lender due to the nature of the property, leaving him with no option but to go onto the expensive SVR or sell the property.”

How can broker and landlords work together?

Rowne said that in isolation, from a commercial perspective, there is “no long-term valid reason for lenders to not have a competitive suite of product transfer products”.

He added: “It generally costs less to retain clients, than the cost of acquisition for new business.

“Indeed, assuming the conduct of the account has been satisfactory, existing clients are also statistically of lower risk, with a first-hand track record of debt repayment, and with the security of being self-funding through the benefit period of the initial loan.”

Rowne said a specialist brokerage should be looking at a client’s whole property portfolio “in context [and] in line with their specialist tax advice” to offer the most “cost-effective and appropriate solution for their overall financing requirements”.

He continued: “A landlord needs to work in conjunction with specialists, both specialist tax and lending advice, and look at their portfolio holistically, digesting the most cost-effective solutions, in line with their medium-term, long-term, and legacy planning, their attitude to risk, even more critical in such volatile times, before comparing product transfer options if appropriate, with those options available if returning to market.

“A good specialist mortgage adviser should bring huge value to the table through this process.”

Looking holistically at a portfolio would involve examining leverage against the background portfolio, product and rate types, property types, use of limited company, Specialist Purpose Vehicles or personal name structure and looking at how a client can balance debt across more than one security.

“This is where a specialist brokerage can really add long-term value to a client’s property business, whilst building a lifetime of client loyalty,” Rowne said.