A rise in complexity means many borrowers need an adviser more than ever, writes Guy Anker
Despite the purported shrinking size of the buy-to-let market, the surge in complexity for landlords is a big opportunity for brokers.
The market has had to deal with significant tax hikes and a toughening of criteria in recent years, which has made the BTL mortgage process harder.
As the upshot has led to specialist lenders coming to the fore, this naturally means brokers can play a bigger part in the market as often those lenders will only advance cash to clients via an intermediary.
Experts insist a broker’s position is further strengthened by the fact the added complexity means many borrowers need extra advice – whether to find them the right lender, to decide whether to form a limited company through which to buy a property, or whether to take the plunge into BTL at all given the changes.
Recent weeks also represented a watershed for many landlords as the tax due by the January self-assessment deadline was the first tranche of cash subject to some of the tax hikes they have had to endure.
Precise Mortgages managing director Alan Cleary says: “BTL represents a good opportunity for brokers as the market is becoming more specialised.
“The more complicated a case, the more you need a broker and you cannot see many people doing a BTL without a broker as it is so onerous.”
Naturally, many intermediaries agree that they are at the forefront of the BTL process.
London & Country associate director David Hollingworth says: “The BTL market relies on advisers with many products only available through brokers. Given the complexities that have only grown since tighter criteria and tax changes were implemented, it makes sense to use an adviser.
“That will help them identify the right approach and make sure that they do not run the risk of missing a lender they may not have heard of, but which could be the one that can fulfil their requirements.”
Trinity Financial product and communications director Aaron Strutt adds: “Many borrowers do not realise there are so many lenders with completely different risk profiles. What is more, the smaller building societies are increasingly operating like private banks as they have business development managers who are writing up lending proposals and submitting them to credit committees for approval.”
An example of how the market is changing is the rise in the number of BTL homes bought via a limited company to escape some of the tax hikes.
Figures from Mortgages for Business show in the first half of 2015 – before then chancellor George Osborne signalled the rises – some 18 per cent of completed sales were via this method. This had risen to 44 per cent by the third quarter of last year. In fact, Precise says its biggest product is now limited company BTL.
Meanwhile, to show another side of the move towards more specialist lending, more than half of Precise’s BTL clients are landlords with large portfolios.
Cleary cites an example on a recent case where a client had 200 properties as part of their BTL portfolio.
“We had to key 200 properties into the system and work out if all were viable,” he explains.
“A big lender cannot do that but we can.”
Often, only specialist lenders and small building societies will lend to landlords with large portfolios, meaning these home loans can only be accessed via brokers. It is a similar story with homes with multiple occupancy, and holiday lets may be the next growth area for specialist lenders, with some now entering that arena as banks wake up to the Airbnb revolution.
Moneyfacts spokesperson Rachel Springall says: “Smaller lenders are making their mark to compete with the more mainstream brands so it is not just about the cheapest package any more.”
Looking at the portfolio market, Moneyfacts gave Mortgage Strategy a list of lenders it holds whose criteria on two-year and five-year fixes do not state a maximum number of properties a client can hold. So in some circumstances, borrowers could be in their hundreds while still paying back the loan.
To show how it is mainly a specialist sector, it is arguable that none of the 16 on that list could be considered household names, with only Aldermore and Kent Reliance having even a semblance of a mainstream brand presence, but that is only through recent high interest savings accounts. Other well-known names on that list to the broker market – but not to the consumer market – include Paragon and Precise. So without a broker, much of the public may not be familiar with these firms.
It is perhaps not surprising that specialists are the key players on portfolio lending when major criteria changes in 2017 led to some big players exiting the large portfolio market, such as Platform and Santander.
That year, the Prudential Regulation Authority began requiring lenders to assess borrowers’ ability to repay at least a 5.5 per cent rate, unless the initial term is fixed for a minimum of five years. Meanwhile, landlords with four or more properties faced even stricter affordability checks from then.
Some experts suggest the combination of specialist lenders and their broker introducers is what keeps the niche sectors of the market afloat.
Strutt says: “Specialist lenders are certainly giving the market a boost and helping landlords who are unlikely to tick all of the boxes at the bigger providers.”
Hollingworth adds: “Smaller lenders may well offer a proposition that can meet a more niche or specialist requirement, whether that be the type of property, the structure of ownership or the borrower’s profile.”
The first of the major shockwaves for BTL began in April 2016. From that point, people buying anything other than their first home have had to pay an additional three percentage points in stamp duty on top of the standard sole home rates.
Then from April 2017 a staggered overhaul began whereby landlords were restricted in how much mortgage interest they could deduct from their taxable income.
We are now almost two years into that phasing and by April 2020, they will get only basic rate relief, which reduces the after-tax income of higher- and top-rate taxpayers.
However, this is not an issue for landlords who buy properties via a limited company, hence the growth of this method.
While the new stamp duty regime has been in place for a few years, the effects of the cut in how much mortgage interest can be deducted from a landlord’s tax bill may only just have been felt by some landlords last month when tax bills for the 2017/18 financial year were due.
What is more, as the full effects only hit next year, the penny may not have completely dropped for some yet.
Whenever that watershed moment hits, it means some clients who might never have sought advice may now need that extra helping hand.
To avoid these tax hikes, many landlords now buy properties through a limited company. This way, all expenses, such as mortgage interest, can be deducted from income for tax purposes. Landlords can then take a dividend, which is taxed at a lower rate than standard income.
Yet the limited company route is not without costs, and many brokers insist it is best for landlords with multiple properties.
It can mean additional capital gains tax and stamp duty when transferring from personal to corporate ownership, while mortgage rates are higher. As you can see, the decision can get complex and most will need advice.
“Few people know whether to buy through a limited company,” says Cleary. “That is just the sort of advice that a good broker can give.”
Yet even amateur landlords with one or two properties may need detailed advice on whether BTL is right for them and they too may find they can only get a deal via a specialist lender that only a broker can access.
Key obstacles that landlords face could be if they are deemed too old to have a mortgage, if they do not have enough equity or if the property or type of tenancy is deemed unsuitable.
On age, for example, there is a vast difference between various banks and building societies in how old they allow a borrower to be while paying back a BTL home loan.
Santander will only allow BTL borrowers to be a maximum of 75 at the end of their mortgage term, whereas BM Solutions and Barclays go to 80. Coventry Building Society and Kent Reliance go to 85.
Yet some smaller or specialist lenders such as Bath and Dudley building societies have no maximum age limit, so in some cases they will lend to borrowers knowing a certain proportion will die before the end of the term.
Precise allows applications up to age 80, and its long maximum terms even at that age mean some of its customers will be well into their hundreds while paying their debt back.
This is a growing trend across the entire mortgage market, often with building societies at the forefront.
Charlie Blagbrough, policy adviser at the Building Societies Association, says: “Over the past few years we have seen the mortgage market waking up to the realities of an ageing population.
“Housing wealth is increasingly concentrated in the hands of older people, and they are becoming a larger part of the population, so it makes perfect business sense for lenders to serve this demographic.”
Cleary adds: “Some of the mainstream lenders will make a landlord sell up if they hit a certain age and that property could be the one that forms the biggest part of their income in their later years, but the lender may want the money back.
“In contrast, some specialist lenders allow older people to have a mortgage and will not force them out as they grow older.”
Yet just before it looks like it is all about the specialist lenders, the big boys still represent the vast majority of the market.
Cleary points to BM Solutions, Coventry Building Society and Nationwide Building Society as the dominant BTL lenders.
Experts Mortgage Strategy spoke to suggest the specialists often have more expensive rates compared to the big banks when comparing like-for-like mortgages at the standard end.
“The smaller lenders tend to charge higher rates,” says Strutt.
“When we get a BTL enquiry we do not tend to go to smaller lenders straight away unless we know they are the only option.
“Our brokers are price-sensitive because we know most clients will be put off by expensive deals, unless they have an unusual situation.”
Of course, most brokers will argue that it is just this knowledge of the nuances which makes them invaluable.
What is more, even lenders considered big players by mortgage experts may be as unfamiliar to many consumers as the specialists, which necessitates the need for good product advice as even on a simple case, a client may miss out on the best deal by going direct.
Although brokers should know the likes of Accord and The Mortgage Works are intermediary brands of Yorkshire and Nationwide building societies, respectively, it is questionable whether many of the general public know this too.
While the general view is BTL represents a good opportunity for brokers, we must not forget that it is a shrinking sector, given many landlords have been put off by the many shockwaves over recent years, so overall pickings are slimmer than previously.
Latest figures from the UK Finance trade body show that in November 2018 there were 6,100 new BTL home purchase mortgages completed, which was 9 per cent fewer than in the same month of 2017, with the value of those transactions falling by 11.1 per cent.
Nevertheless, it is clear many lenders welcome the presence of intermediaries.
Intermediary Mortgage Lenders Association executive director Kate Davies says: “Mortgage intermediaries are absolutely crucial in a healthy BTL market.
“That is why intermediary lenders work hard to develop and nurture relationships with brokers to make sure brokers are aware of their products, and then bring those deals to the market.”