Recently, there has been a crescendo of concern among brokers for landlords reaching the end of their benefit period or fixed rate.
This is magnified in the sphere of specialist buy-to-let (BTL) with some lenders in fact not offering any product transfer (PT) options at all.
Aside from the significant increases in lenders’ interest rates, there has been an increase in lenders’ rental stress rates of 2%-plus. Indeed, most advisers will be acutely aware it is actually lenders’ interest coverage ratio (ICR) calculations/stress tests that are proving as large an obstacle to landlord lending as rate volatility is.
Some lenders are not offering any PT options at all
The impact of this gap in the specialist BTL market is magnified, with ‘specialist’ BTL now the norm for portfolio landlords. Reportedly, nearly 50,000 new BTL companies (special-purpose vehicles) were incorporated in the UK last year alone.
During 2021, half of new BTL mortgages were taken out by landlords with a company; a pattern that is only going to accelerate with landlords’ sharp increase in finance costs now reaching a tipping point and those holding a portion of long-held property in a personal name being advised to incorporate on the back of professional tax advice.
With some prominent lenders, you can apply on their standard product range (effectively treating the application as a remortgage with full assessment/underwriting, valuation etcetera).
Brokers need to continue to collaborate with lenders in respect of further innovation
However, not only are there further costs that are not applicable when executing a PT, but any such application has to fit current criteria/ICR calculations/stress testing, as would be the case with a new client — essentially, not actually offering an additional solution to many landlords.
No deal
Without considerable innovation or full lender adoption of PTs, the consequences for landlords, and for the wider private rented sector (PRS), are huge.
On a basic level, this could mean landlords fortunate enough to fit ICR/stress rates face higher remortgage rates; while those that don’t are forced to either reduce the debt by paying down additional capital (an option available to only a smaller tranche of landlords), or sit on high standard variable rates, or face not being able to secure a deal (exiting the market entirely is just not a practical option for landlords, or for an over-subscribed PRS already creaking at the seams).
I remain incredibly optimistic that solutions will continue to emerge in the short term as the industry adapts
From a commercial perspective, there is no long-term valid reason for lenders not to offer PT products. The cost to retain clients is generally less than the cost of acquisition for new business.
Traditionally, client retention also nominally reduces the risk on a lender’s book, assuming the conduct of the account has been satisfactory. Existing clients are also statistically of lower risk.
However, the real reason is not quite as simple. Within the small tranche of lenders not yet offering PTs, some have presented the required system changes as the main barrier (although one would assume the cost would be offset in the long term by the considerable commercial benefits of client retention). And for some it is more of a funding line issue (such is the way many specialist lenders within our sphere are funded).
Newer lenders
Naturally, newer lenders do not have a backbook of historical clients, and thus have no immediate need for PT products. For those lenders, such an offer will generally be introduced as the lender matures (between two and seven years post-launch — once the cost of any system changes/new funding lines can be offset by the benefit of efficient client retention).
The burden of responsibility to solve this problem should not lie solely with lenders
Aside from the commercial opportunity for specialist brokerages, we all have a responsibility to offer holistic advice, and indeed holistic solutions, to our clients. A specialist broker should be looking at a client’s entire property portfolio in context, in line with their specialist tax advice, to ensure that the solution(s) they recommend is the most cost-effective/appropriate for their overall financing requirements. They should not simply offer transactional advice in respect of the property the client has enquired about.
I remain incredibly optimistic that solutions will continue to emerge in the short term as the industry adapts to the changing economic landscape. Specialist lenders have continued to pioneer innovation within our industry over the past seven years, enabling landlords and brokerages to circumnavigate the choppy waters of the myriad of governmental/tax/regulatory changes and the pandemic.
From a commercial perspective, there is no long-term valid reason for lenders not to offer PT products
That said, the burden of responsibility to solve this problem should not lie solely with lenders. Brokers need to continue to collaborate with lenders in respect of further innovation to ensure that the modern professional landlord, and the much-needed (and much-oversubscribed) PRS, remain robust.
Matthew Rowne is director of The Buy to Let Broker
This article featured in the November 2022 edition of MS.
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