Insight from lending and savings software provider Finova looked at lenders that offered specialist BTL products and found that 22% said holiday let generated the highest margins, followed by limited company BTL and mortgages for houses in multiple occupation (HMOs), with a fifth of lenders each saying these products produced the highest returns.
Further, 15% of lenders said commercial BTL was the most lucrative.
However, in its report, New Foundations: Building the Next Era of BTL Lending, lenders said that 44% of borrowers with complex needs – who were more likely to choose a specialist BTL product – were the most under-served. Lenders suggested they were more under-served than first-time buyers, with 39% suggesting they were overlooked by the market, and landlords at 34%.
Specialist BTL lending is also less risky, lenders suggested, as 48% said the default risk was lower for limited company BTL. Some 56% said the default risk for HMOs was lower, while 43% cited portfolio landlords.
Finova found that brokers also felt the same, as 47% said the likelihood of defaults tended to be lower across specialist BTL products.
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A market with potential to grow
Respondents to Finova’s research revealed brokers and lenders alike expected the specialist BTL mortgage market to grow.
According to lenders, the strongest growth would come from HMOs and multi-unit blocks (MUBs), with 38% believing this, while 37% pointed to limited company BTL and 36% said holiday lets.
On the other hand, a third of brokers said green mortgages had the most potential, while 32% said holiday let mortgages and 31% said limited company BTL.
Where challenges come from
Finova said lenders and brokers were potentially missing out on business coming from complex BTL borrowers, particularly as 44% of lenders said borrowers with complex needs were the most under-served.
This was followed by 43% who suggested the needs of expat and overseas borrowers were the most overlooked and 43% who said holiday let or multiple property owners.
Brokers said they also had difficulties placing some cases, with 39% saying there were challenges with properties with a lower Energy Performance Certificate (EPC) rating. For 37% of brokers, cases with complex documentation for corporate and limited company structures were a challenge, while 34% said the same about limited product availability for complex or non-standard properties.
Finova noted that a barrier to placing cases could be because of limited options, as it said just 29% of lenders had an active separate platform for specialist lenders.
Hamza Behzad, business development director at Finova, said: “The growth of the specialist buy-to-let market is too significant to ignore. What was once a niche segment is now a core part of many lenders’ strategies – but the nature of the customer has changed dramatically.
“Today’s specialist borrowers are more complex, and legacy systems weren’t built to support the nuanced affordability assessments or know your business or know your customer checks they require. Our research shows that while these products offer stronger margins and lower risk, many lenders are still relying on rigid processes that can’t keep up.
“To grow sustainably, lenders need to adapt. Those that invest in better tools and work closely with brokers to serve these customers more effectively will be best placed to lead the next era of specialist lending.”
