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Ask the right questions to avoid buy-to-let pitfalls

As the buy-to-let market grows and investors become more sophisticated, Tom ONeill urges brokers to work closely with customers to ascertain products that are relevant to their needs and with lenders in order to foster innovation

In recent years mortgage intermediaries have seen a steep increase in the number of buy-to-let investors and the market has grown to such an extent that there are now companies that focus purely on buy-to-let lending.

Irrespective of whether a broker is a high volume player in the buy-to-let market, dealing in the mainly off-plan market or simply a single self-employed broker managing a portfolio of clients, one thing is clear and that is how sophisticated these clients have become.

The new breed of investor presents intermediaries with a set of interesting challenges, one of which is an increasing demand for products that are relevant to their specific needs. Having strong and consultative relationships with lenders is extremely important in this respect, but brokers need to engage with lenders about product innovation more than ever before.

Setting the agenda with lenders is important because many brokers will be their primary source of business, so it is crucial for brokers to insist on excellent service levels while monitoring the lenders ability to accommodate their business objectives. When setting the criteria for good relations between lenders and brokers the availability of a product is a major concern, as is the decision about its relevance to the needs of the client.

Intermediaries must be aware of the need for feedback from the lender so they know what is happening and who is responsible for ensuring it happens in a timely fashion. The ability of the lender to turn a case around as quickly as possible is vital, as is the ability to carry out transactions online and instruct a valuation. This is partly because a new kind of investor has entered the market with more clearly defined goals, and mortgage intermediaries need to work more closely with these clients if they are to help them achieve their goals. It is said intermediaries are more reactive than proactive. This is not a bad thing, but it exposes a lack of understanding about what motivates a client when they enter the buy-to-let market.

Many of the best intermediaries will have been mentored by other senior figures when they entered the industry. But it is a best practice that has been dying out. This is unfortunate, as being able to differentiate between a clients perceived needs and their actual agreed needs is a skill that needs to be passed on.

It is not always easy to work out what these needs are, so intermediaries have to ask the right questions. If not they can find themselves trying to fulfil what they perceive as their clients needs only to discover later that there is a need they were unaware of. Many intermediaries make the mistake of focusing on what their clients want rather than why they want it. To be successful in the buy-to-let market brokers must avoid such pitfalls.

The easiest way to do this is to ask new clients why they want to invest in the buy-to-let market and for how long. Most investors usually reply with any of a hundred responses, but there are three primary replies.

For some, the buy-to-let market offers another way in which to plan for their retirement. Many people are uncomfortable with depending solely on pensions and the stock market to ensure their financial security in their old age. For others, it is really only a lifestyle choice, or they simply might not want to be a wage slave any longer. For this group of people, financial independence is the goal.

Finally, there are those who are concerned about the ability of their children to get onto the property ladder without a large financial injection from them.

While each type of buy-to-let investor shares the need to get the best mortgage deal from the best provider, knowing what motivates a client is probably the most crucial factor if their property deal is to work as well as they might hope.

As well as identifying a clients needs, it is important to remember they do not want hours of form-filling. They expect consultation. They want a speedy and painless transaction, and technology will help here.

In the light of the edeus and GMAC propositions, it is inconceivable that any broker could pay only a passing regard to the impact of recent technological advances. The effect that e-conveyancing and automatic valuation models are having is huge and is changing the way business is now transacted. Intermediaries must make their propositions more accessible by embracing the technological advances available.

Intermediaries should also pay attention to search engine optimisation and how to get their name at the top of any search engine list such as Google. This is easier said than done, but any money that goes into SEO technology will be money well spent. And brokers need to be aware of the benefits such additions to their websites can bring.

Some say the buy-to-let market has a limited shelf life. But until pension reform and simplification do what they were intended to do, people will look to property as a way to diversify their investments. Yvette Cooper, minister for housing and planning, recently admitted there was a shortfall in the number of new homes being built each year around 40,000. As a result, demand is outstripping supply, so the buy-to-let marketplace still presents a strong business proposition.

And at a recent Council of Mortgage Lenders buy-to-let seminar it was predicted that this sector of the market has at least a 35-year life span, with a view that the country is moving more towards a rental economy.

At the same time there are questions as to whether buy-to-let is propping up the housing market and what happens if investors decide to sell up. In the first place, this is highly unlikely and it also ignores the fact that investors need an exit strategy if the are to achieve their financial goals. Moreover, it is the responsibility of the intermediary to help clients discern what their goals are but it is for the investor to make the final decision the intermediary cannot stop their client from making a bad decision, they can only advise the client. Buy-to-let investors are a diverse group, but they are motivated by two governing factors: the need to get tenants into the property as soon as possible and the desire to at least cover their monthly mortgage repayments.

A common mistake people make is to chase high loan-to-value deals, as they do not have to commit too much financially into the deal. But this often means the investment will struggle to generate enough rent to cover the mortgage payments. Many of these deals use rates the industry would consider to be at sub-prime or near prime level.

While the investors goal should be to get tenants into their property as soon as they can, how they achieve this is a different matter. It is vital to put the aims down on paper and agree to timescales that are reviewed with the clients as they move closer to their goal. A proven method of achieving this is by a full portfolio review. This involves reviewing the whole portfolio, inclusive of mortgages, personal credit, property and equities. Intermediaries should supply their clients with a full and accurate assessment of their inheritance tax and capital gains tax position on a regular basis. In this way the client will receive a professional report outlining all of the above and detailing how they and the broker can monitor and achieve their goals with the first review taking place within 18 months of their first investment.

Tom ONeill is chief operating officer of Fuel Investments


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