Criteria innovations could get BTL market and landlords moving again – Waters

Already feeling the pain of a tax regime that has become a lot more hostile over the past decade, higher rates are affecting the amount of leverage landlords can achieve.

Unless landlords can significantly hike rents or have the capital to fill the void, they are stuck. But the trouble is, many can’t.

That is having a knock-on effect on lending activity. Last year, purchase lending slumped 53 per cent, according to UK Finance, and is expected to fall a further 13 per cent this year.

One of the ways lenders can provide some fresh impetus back into the market is if they are willing and able to think outside of the box when it comes to their criteria.

We have already seen this to some degree. Around the middle of last year, when the Bank of England (BoE) was in the middle of its tightening cycle, many lenders came to market with lower-rate, higher-fee ranges. That helped ease some of the pressure on landlords, allowing them to borrow more without having to hike their rents.

New products and approach to stress testing could help landlords

However, I believe there is more than can be done. The first area I would look at is the stress test, which of course doesn’t apply to borrowers who fix for five years or more .

But not all clients want to fix for that long. We’ve got clients who expect rates to fall over the next couple of years, so want to lock into a two-year fix or even a variable rate deal.

The trouble is those who do find that they cannot borrow as much due to lenders’ stress tests. Those tests are there for good reason, of course: to ensure sensible lending.

That said, there is an argument to say that some lenders’ stress tests are overly strict, given they have already done their job.

I would also like to see some sort of partial interest retention product, which is popular in the bridging sector, introduced for landlords.

How would that work? Rather than pay the interest each month, some of it would instead be ‘retained’ and paid at the end of the fixed rate period.

Alongside a more relaxed stress test, a retained interest product might make the difference between a borrower qualifying for a loan or not.

There would be drawbacks and challenges, of course. Because of the retained interest element, the loan size may be a little smaller. And due to regulation, lenders can only reduce their stress tests so far.

Retained interest loans may also cause problems for lenders that rely on the securitisation market for funding, which is perhaps why we haven’t seen them to date.

But if it were possible and done sensibly, it would offer minimal additional risk to the lender, while also having the dual effect of boosting sector activity.

Product transfers and top slicing ‘conventional ways’ lenders can up activity

There are also more conventional ways lenders can help drive activity in the market.

For a start, not all of them have product transfer offerings or, if they have, they are fairly limited. In a market where new business is harder to come by, surely retaining the business you have already got becomes imperative?

And what about top-slicing? Some lenders do consider borrowers’ other assets and income, but many don’t. And even when they do, the process is rarely transparent.

I don’t profess to have all the answers. But in a market that is no longer benefitting from the activity boosting power of low rates, innovative criteria offer our best hope of breaking out of the slump.