The buy-to-let market has been a saviour for many intermediaries over the past few years but one sector remains largely undeveloped by the majority of residential mortgage brokers: commercial and specialist buy-to-let.
Why do brokers shy away from this area? For most it is because of a lack of familiarity and a concern that cases may be too complex and therefore become very time-consuming. But these concerns are largely ill founded and, with support from a specialist partner, there is no reason why most residential mortgage brokers cannot profit from placing commercial and specialist buy-to-let deals.
And profit is the name of the game. These buy-to-let cases pay a procuration fee that is, typically, almost double that of a standard residential case. The little extra effort it takes to break into a new sector can potentially pay handsome dividends.
So what is meant by commercial and specialist buy-to-let? The answer is anything that is not a straightforward residential buy-to-let case and examples include houses in multiple occupation, multi-units on one title, lending to limited companies (both trading companies and special-purpose vehicles), high-street retail units, semi-residential retail units, DWP tenants and unusual cases such as borrowers wanting to remortgage having owned a property for less than six months.
A key difference between the standard and specialist buy-to-let sectors is that, although dozens of lenders are willing to lend in the former, only a handful are willing to lend in the latter. And most make their funding available only via a small number of specialist partners that can help brokers prepare applications for submission. Brokers can either outsource the packaging while continuing to advise their client or refer the client to the packager, which will provide a complete end-to-end client service.
Which approach to choose is an important consideration for residential mortgage brokers thinking about breaking into the specialist market for the first time. It does not have to be a step into the unknown; there are specialist companies that will provide as much or little support as is required. Further, those companies have access to exclusive deals and the sort of competitive pricing that is not available to brokers on a direct basis.
In fact, most specialist lenders operate a controlled distribution model and do not deal with brokers on a direct basis, preferring instead to deal with a smaller number of specialist distributors. And it is worth bearing in mind that about four-fifths of all business written by commercial lenders is commercial buy-to-let.
Why should residential brokers consider moving into commercial and specialist buy-to-let now?
It is not simply about diversifying your business model; it is also about capitalising on a market that is showing real signs of growth. Many professional property investors have become re-energised and are looking to grow their portfolios by acquiring higher-yielding assets.
At the same time, high-street banks are continuing to cause problems for investors by changing their lending terms and calling in debts, particularly interest-only deals, which they are converting into repayment mortgages and which has created a need for alternative funding.
A new breed of challenger banks, such as Aldermore, Cambridge & Counties Bank, One Savings Bank (which includes Kent Reliance and Interbay) and Shawbrook Bank, all offer interest-only deals on commercial and specialist buy-to-let and have skilled and experienced underwriters who assess each case on its own merits.
All are willing to tailor deals to suit clients’ specific needs, rather than make them fit standard products. And the arrival of new entrants such as Fleet Mortgages will inevitably bring greater competition and choice.
Although specialist distributors give access to specialist lenders and exclusive deals, there are issues brokers need to consider before submitting an application to ensure it stands the best chance of success.
For example, brokers should establish their client’s future strategy for financing the asset and find out if the client intends splitting a title. They should also confirm if the asset will be owned by a limited company that is a trading business or whether it is a special-purpose vehicle set up for the purpose of owning an investment property.
3mc places a wide range of commercial and specialist buy-to-let deals and the following recent case is typical of the sort of enquiry we receive from mortgage brokers on a regular basis.
It involves a limited company wanting to remortgage in order to raise £350,000 on five flats with a single title, generating an annual rent of £25,000. The accumulated value of the five individual flats was £470,000 and as a single investment the value was £425,000. The client had £8,000 taxable income per year and was seeking an interest-only mortgage.
This case was outside the scope of normal buy-to-let lenders and the preferred specialist lender would normally lend only to a maximum of 75 per cent LTV. However, by working closely with the broker and lender, we were able to achieve an LTV of 82 per cent.
Brokers should not be put off by what may initially appear a complex case. If the application is well supported and documented, there is a reasonable chance it can be placed.
An issue that can cause confusion with commercial cases is the different way in which lenders value properties, but that is beyond the scope of this article and will be covered in detail at a later date.
If you are used to placing residential buy-to-let mortgages, do not be put off by more complex commercial deals. With specialist support, they can be placed and may open up a profitable additional stream of new business.